Mortgages & Minimum Credit Scores
Mortgage lenders are approving more mortgage loans than during any period this decade. In part, this is because new loan programs have emerged such as the FHA Back to Work loan for buyers with a recent bankruptcy, foreclosure, or short sale; and, the Conventional 97 which allows for three percent down payment on a home.
So, what's the minimum credit score required to get a mortgage approved?
Ask a group of lenders and you’ll get answers across a wide range of the credit scoring spectrum -- which is unhelpful, of course. Without "one minimum score", you can't know whether you'll be approved until you go to underwriting.
Even more challenging is that, although loan programs come with prescribed minimum FICOs, lenders have the right to ignore those minimum scores, and many often do.
With FICO scores ranging from 350-850, what score do you exactly need?
Credit Scores & Automated Underwriting
As a mortgage borrower in the United States, there is no shortage of mortgage loans available to you.
Loans backed by the Federal Housing Administration (FHA) and Fannie Mae and Freddie Mac allow down payments as low as 3.5% and 3.0%, respectively.
And, VA loans from the Department of Veterans Affairs and USDA-backed Rural Housing Loans both allow no money down.
In order to qualify for these loans, which are all government-backed, a minimum credit score is required.
In today's housing market, the minimum FICOs required are lenient.
Fannie Mae and Freddie Mac: 620 minimum FICO score
FHA loan: 580 minimum FICO score
VA loan: No minimum FICO score
USDA Rural Housing: No minimum FICO score
There's more to know than just the minimums, of course (which is why underwriting guidelines are comprised of hundreds of pages). In addition to credit scores, lenders evaluate borrowers based on down payment, income, savings, and debt loads, too.
And, if that seems like a lot of information, that's because it is.
It's so much information that mortgage lenders use automated underwriting software (AUS) to make an approval recommendation.
In general, AUS findings work like this:
High credit scores with strong income, assets, and debt get approved
Low credit scores with weak income, assets, and debt get turned down
If your credit scores are weak but you have high, stable income; a large amount of savings; and a manageable load of debt, you're likely to get approved via AUS.
Similarly, you're likely to be approved if your credit scores are strong but you're average in the supporting zones.
You don't have to be strong in all areas to be approved. The key is to understand that lenders don't treat "low credit scores" in the same way that they treat "bad credit".
Your FICO Score Doesn't Tell The Whole Story
620 is the minimum FICO score for a conventional home loan and that's widely considered to be a below average score.
However, low credit scores can happen for a lot of reasons. Maybe you prefer paying cash over using credit; or, maybe you're too young to have a credit history; or, maybe you carry high balances.
A "respectable" credit history can get you approved.
Bad credit, though, is different.
Characterized by collections, write-offs, and late and missed payments, "bad credit" will get your loan denied -- especially when lenders begin to apply their overlays.
A mortgage overlay is an additional mortgage guideline imposed by a lender, which goes beyond the loan's official minimum standard.
For example, Fannie Mae allows the financing of more than four properties via a program called the 5-10 Properties Program.
However, because this loan is a challenge to underwrite, many mortgage lender put an overlay in place which disallows financing a fifth property in a portfolio.
Another example of a mortgage overlay is with the FHA Streamline Refinance program.
According to FHA guidelines, the FHA Streamline Refinance program does not require the verification of income, assets, or credit; nor does it require employment.
Yet, many lenders opt to make those verification's in order to hold loan quality high.
A recent study from Fannie Mae found that nearly two-thirds of mortgage lenders apply mortgage overlays. The most common overlay related to credit scores.
47% of lenders applied overlays to the minimum credit score requirements of a mortgage loan. Your credit score, therefore, may not get you FHA-approved, even if the FHA allows it.
This is why it's smart to re-apply for a mortgage if you've recently been denied. Your loan may have been turned down, but that could be because of an overlay. Click here for a link to my secure online loan application.
So, what's a good credit score? Call me today and we can find out!
Nations Reliable Lending, LLC
Colorado's Mortgage Expert
Scott Synovic is a top performing mortgage loan originator providing superior levels of service and satisfaction to clients and business partners in Colorado - www.scottsynovic.com NMLS #253799 Fairway Independent Mortgage Corporation #2289