Mortgage Loan Credit Standards Are Sufficient Aspects of Getting Approved
Credit standards have always been important in obtaining a home loan. Credit is the most important factor in applying for a mortgage loan. The mortgage crisis of the latter years hopefully has taught us some lessons of value.
Borrowers are wiser in choices, and lenders and originators are wiser in the offerings of mortgage products that suit the borrower’s needs.
According to some updated information that I read recently, the streak of delinquency is far above and beyond being as devastating as the prior years. However, it never hurts to remind applicants of this one important factor.
Corelogic Insights report indicates that U. S. Delinquency and overall credit performance in mortgage lending is at the lowest level in more than 20 years.
That is excellent news for homeowners, lenders, and the investment banking industry as a whole.
Looking Back…
When I started this blog, I mentioned the importance of you knowing and understanding what to expect about the process of making a mortgage loan application. I believe I mentioned that first, your credit is the most important factor.
A guide to go by is simply that your credit score for a conventional loan should be 680 and above. This is dependent upon the loan criteria such as down payment/loan to value, reserves, and entire loan analysis. There may be instances where a score down to 620 is approved. Guidelines have become stricter, not more complicated, but demand for better quality does exist.
Sometimes this varies per product and other criteria. This does not mean that a mortgage loan is NEVER made with a score of less than 680. However, some mortgage products, depending upon loan to value, type of products, assets, and other criteria require a 700 or greater credit score.
This is only a guide depending upon other factors such as employment history, income history, funds for closing, and reserves. These come into play when a mortgage loan is evaluated by an underwriter. It must all fit together like a puzzle but the most important part of this is in the mortgage loan process; *is credit.
The better your credit, employer/income history, and debt to income; the better opportunity you have to get the right mortgage loan for you.
Conventional Lending Credit Scores – Minimum FNMA Guidelines
The mortgage lending name for the applicable credit score within an applicant’s credit report is called a “representative score.” This means that a tri-merged credit report from the three major bureaus is pulled. These are; Equifax, Transunion, and Experian.
The lender will use the lowest middle score of the applicant(s). If there are two borrowers the lowest middle score of one or the other is used.
Example:
Borrower Scores = 680-689-700 – co-borrower = 675-680-700
The co-borrower score of 680 is used for the representative score.
FNMA will allow credit scores down to 620 for conventional loans for manually underwritten loans. This score also applies to FHA loans purchased by FNMA.
There Are Exceptions To Minimum Credit Scores
When you have no credit or credit scores, these are always manually underwritten loans… there are still Mortgage Credit Standards involved in manual underwriting…
When you do not have “any” credit, (which usually occurs with a first-time home buyer), it is not what we call “bad.” It does not necessarily mean that you cannot get qualified for a mortgage loan. There is such an evaluation of alternative credit sources. These are normally manually underwritten loans as well.
The alternative to this issue as your credit history may be developed with the following: (includes all mortgage types, Conventional, FHA & VA). Most lenders will follow the agency guidelines regarding the use of NON-TRADITIONAL CREDIT and this is how it works:
- The credit bureau will obtain information from you regarding what other non-traditional credit you have.
- This can include rent (if you do not still live with your parents). Car insurance, cell phone accounts, utilities, and car payment from a small company that does not report to the bureau. ANY account that you might have that you have some history on.
- Preferably a 12-month history on at least (3) of these accounts. *there could be additionally needed in some circumstances.
- The information is compiled and listed on the credit report in the same manner as traditional credit.
The Federal Housing Minimum Scores (FHA)-for Mortgage Loan Credit Standards
FHA guidelines for credit scores are some lower, however, usually, lenders (most mortgage banking institutions) base their decisive credit scores at about 620. This is to protect their level of delinquency and keep their portfolio standards intact. They review the entire file for compensating factors to make sure their delinquency ratios are protected.
FHA loan minimum credit score is 580, depending upon the entire loan facts, and the lender. If the credit score is below 600, this would indicate it is a manually underwritten loan. Make sure the lender you go to will have manual underwriting. If a loan is approved with extenuating circumstances for credit issues, or no credit score at all, this means that non-traditional credit is reviewed and must be acceptable. Different lenders may have different credit standards.
The debt to income would need to be no more than 43%. Any loan that is a ‘Refer’ within the automated underwriting system (DU- Fannie Mae or LP -Freddie Mac) will be a manual underwritten loan for FHA.
As stated most lenders apply their own guidelines when evaluating the entire file. It must show signs that the loan is repaid in a satisfactory manner.
What Is Good Credit
Good credit is essential for obtaining the best mortgage interest rate, and in our life as a whole. It is important to always be aware that crooks are out there. Protect your credit by keeping an eye on how your credit is reported to the bureaus.
It is important to pay your bills on time, every time. This is a crucial necessity, whether you are applying for a mortgage loan or any loan. Too many loans, credit cards, and applying for credit can hurt your score and your debt to income ratios.
This is how your credit report should read…not any of the following…
- 30 – 60 day late payments
- judgments for loans not paid
- mortgage late payments, and
- no tax liens
All of the above mean “great credit.” However, other things are evaluated within your credit report to give you the applicable score used by the lender.
What to watch: if you have too much credit and the following:
- too many revolving charge accounts
- co-signed loans without proof the other person pays for 12 months
- unpaid child support payment
- delinquent alimony payments
- judgments for any debt you are obligated to pay
Check Average Interest Rates here…
Good Credit Is Not Only For a Mortgage Loan Credit Standards…
Credit history is used not only for applying for a mortgage loan or consumer loan but also when you apply for car insurance, home insurance, and when you apply for employment. This is why it is so important that you maintain your credit and guard it as if it were “your life”. It really is because, without it, your quality of life can very well change. This cannot be stressed enough when applying for a mortgage loan.
- It is important to not overextend your credit
- Do not charge your credit card balances to the top of your credit limit *this affects the overall credit score
- It is wise to not let yourself be 30 days late on any payment
- Take your credit position to heart just like brushing your teeth
Free credit reports are available. There are three major credit bureaus, and each reports different credit obligations very often. Therefore, your credit score may fluctuate from bureau to bureau.
These bureaus are:
TransUnion- 1-800-916-8800
Equifax – 1-800-685-1111
Experian – 1-888-397-3742
They have websites also.
Example of Credit Standard from Lending Tree
