Can I Qualify For A Mortgage With Under 600 FICO Credit Scores?

Home Loan With Under 600 Credit Scores

Gustan Cho Associates

Mortgage lenders view mortgage loan applicants with lower credit scores as higher risk borrowers.  Higher risk borrowers are viewed as higher risk for a mortgage loan to default and go into foreclosure.  One of the factors they use in determining risk is a borrower’s credit scores.  The higher the mortgage applicant’s credit scores, the lower the risk the mortgage loan is and the lower the mortgage rates are.

To qualify for a mortgage with under 600 FICO credit scores, the mortgage lender will consider the overall financial profile of the mortgage loan applicant and look for compensating factors.  Mortgage loan borrower’s seeking a mortgage with under 600 FICO credit scores will most likely need to seek a mortgage lender who have no mortgage lender overlays and will just go off either Fannie Mae or Freddie Mac Automated Underwriting System automated findings.  There are many mortgage lenders who have their own additional mortgage lending guidelines, called mortgage lender overlays, on top of the minimum guidelines set by HUD and/or FANNIE MAE, FREDDIE MAC, VA, and USDA.  For example, HUD’s minimum lending guideline for a home buyer to qualify for a 3.5% home purchase loan is for a mortgage loan applicant to have a minimum credit score of 580 FICO.

Mortgage Lender Overlays With Credit Scores

However, many banks, credit unions, mortgage bankers, and mortgage lenders have mortgage lender overlays where they require the mortgage borrower’s minimum credit score to be 640 FICO.  If you get turned down by a mortgage lender who tells you that you do not qualify for a FHA loan because your credit scores are under 640 FICO,  it does not mean you do not qualify for a FHA home purchase loan.  It just means that you do not qualify for that particular mortgage lender.  A large percentage of my business are from mortgage loan borrowers with credit scores under 600 FICO credit scores.  A home loan applicant seeking a mortgage with under 600 FICO credit scores does not automatically mean they are a high credit risk and/or are financially irresponsible.  A lower credit score can mean that the mortgage loan applicant does not have any active credit tradelines, high credit card balances, or derogatory items reporting on their credit report that are erroneous.  There are many mortgage lenders that cater to mortgage loan applicants get mortgage with under 600 FICO credit scores.

FHA Mortgage With Under 600 FICO Credit Scores

 The Federal Housing Administration guarantees private mortgage lenders against default on mortgage loans as long as they are an approved FHA mortgage lender and follow FHA mortgage lending guidelines.  To qualify for a FHA insured mortgage loan, a home buyer only needs a 500 FICO credit score.  For home buyers with credit scores between 500 FICO and 579 FICO, a 10% down payment is required.  To qualify for a 3.5% down payment on a home purchase and get a 96.% loan to value FHA insured mortgage loan, a 580 FICO credit score is required.  If your credit score falls below 580 FICO, your mortgage loan originator may have some quick credit fixes to boost your credit score over the 580 FICO threshold.

Collection Accounts, Charge Offs, Late Payments

If you are seeking a mortgage with under 600 FICO credit scores, the chances are that you probably had prior bad credit, collection accounts, charge offs, and late payments.  There are minimum lending guidelines with regards to collection accounts, charge offs, and late payments as well as prior bankruptcy, foreclosure, deed in lieu of foreclosure, and short sales.  There are also lending guidelines concerning judgments, tax liens, child support payments, and government loans.

FHA does not require you to pay off old collection accounts with balances.  For non-medical collection accounts that have balances of over $1,000, 5% of the unpaid collection account balance will be taken towards calculating the mortgage loan applicant’s debt to income ratios.  This can cause a big issue for unsatisfied collection accounts with high balances.  One good news is that if there is a payment agreement signed by both the debtor and collection account agency with a minimum monthly payment agreement, that payment will be used towards calculating the debt to income ratios with no payment seasoning requirement.

Medical collection accounts are exempt.  Charge offs do not matter and are okay since charge offs have zero balances.  Late payments are allowed as long as the last late payment is over 12 months old.  Recent late payments that has not been seasoned 12 months can be a problem.  One late payment in the last 12 months may be allowed, however, multiple recent late payments may pose a problem and the mortgage loan borrower may need to wait 6 to 12 months of on time payment history.

If a mortgage loan applicant has unsatisfied judgments on their credit report, the mortgage loan application process will be halted until a written payment agreement have been set up with the judgment creditor and two months of payments have been made.  An unsatified judgment can be negotiated and paid off for less than the original judgment amount.

Waiting Period After Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure, Short Sale

For FHA loans, there is a two year waiting period after bankruptcy to qualify for a FHA insured mortgage loan.  There is a three year waiting period after the recorded date of a foreclosure or deed in lieu of foreclosure to qualify for a FHA loan.  There is a three year waiting period after short sale and the three year time clock starts from the short sale date which is reflected on the HUD’s settlement statement.

For conventional loans, there is a four year mandatory waiting period after bankruptcy.  There is a 7 year waiting period after foreclosure to qualify for a conventional loan.  There is a four year waiting period to qualify for a conventional loan after a deed in lieu of foreclosure or short sale.  If you had a foreclosure as part of your bankruptcy, there is a mandatory waiting period of four years to qualify for a conventional loan.

Credit Disputes During Mortgage Approval Process

You cannot have a credit dispute for a derogatory credit item that has a balance of over $1,000 that is a non-medical derogatory account during the mortgage application process.  Any non-medical credit dispute that has a balance of $1,000 or greater will automatically halt the mortgage application process until that credit dispute is retracted or the balance is paid off.  Medical collection accounts, zero balance derogatory accounts, and charge offs are exempt.

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The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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