Minimum Credit Score Requirements
Many people still believe that qualifying for a mortgage takes a miracle…ok, not a miracle, but they think it requires near perfect credit scores. This is simply not true. Qualifying for a mortgage is easier than most people think. A month or two ago I posted on my personal Facebook page, and I asked for people to comment about good blog topics that readers looking to buy a home would find helpful. A realtor name Tatiana said, “I still come across a lot of people who think they need 750+ credit score to qualify for a mortgage”. Now, she might be exaggerating a bit, but the point is, people are still uninformed. It is not that tough. After reading this, if you are interested in general or specific information about other mortgage topics, you can follow me on my business Facebook Page, or search by specific topic at the bottom of my top ranking mortgage blog in the search bar.
Qualification for FHA Mortgages
The fact of the matter is, FHA has minimum requirements for qualifications, and just because you might meet those qualifications does not mean that the lender does not have their own more restrictive guildelines. First, you need to understand the basic underwriting step. A loan officer takes your application, and then we submit it through an automated underwriting “engine” through Fannie Mae, or Freddie Mac…the two governing bodies of home loans in America. If we get an approval there, we can move forward…there is enough information about this automated underwriting to make 5 different posts, but that is not the focus here. Throughout the industry, we use the lowest middle credit score of the borrowers on the application…if there is just one borrower, we use their middle credit score, but if there are two or more borrowers, the lowest of those middle scores is the one we use. At our company, if the lowest middle score is 600 or better and we get an approval on the automated underwriting, we move forward and underwrite the file like any other FHA file…just know, there is a little work to do, but that is the basics. Now, if we get that automated approval and the score is 580-599, there are additional requirements, or what we call compensating factors that the borrower must meet over and above the normal FHA requirements. Below are typical compensating factors and requirements you might run into for FHA qualification if your score is below 600.
After reading this post, if you would like more information about FHA and other loans, view my other FHA Mortgage Posts. If you prefer video, click on the picture below to one of my Youtube posts about FHA vs Conventional Lending.
Typical FHA Overlays and Compensating Factors (there can be others but these are the basics)
- Regardless of what debt to income ratios your automated approval had, with lower scores your ratios might be more restrictive…meaning, with a higher score you might qualify for a higher loan amount.
- In the last 12 months, you can have absolutely no late payments on a current mortgage or if you are renting, we’ll verify you have not missed a payment with your landlord or apartment manager
- You cannot have any prior bankruptcy, foreclosures, or short sale in your past
- We will look at your last 2 months of bank statements, and you can’t have any “bounced checks” or insufficient funds transactions…keep in mind, overdraft protection on your account does not mean you are immune. For example, if you write a check, and your account shows “NSF” for insufficient funds, and your overdraft protection had to kick in, we still count that against you.
- There are likely reserve requirements. Reserves is the money you have in the bank or retirement account after you have written your check at closing for down payment and closing costs. Many lenders will require that you have a number of months’ reserves. For example, if you were required to have 6 months reserves, and your new monthly payment was $1,000 a month, then you would need to have $6,000 in reserves after you close on your house.
Minimum Qualification for Conventional Mortgage
Conventional minimal underwriting requirements are pretty cut and dry. We use the same automated underwriting system through Fannie Mae and Freddie Mac. The fact of the matter is, the lowest credit score you will get an approval on through this automated system is 620. It does not matter how much money you have in the bank, or how much you are putting down, you must have a 620 credit score to approval for a conventional loan.
Lending For Borrowers With Below 580 Credit
If your credit is below 580, or your credit score is between 580 and 599 but you do not meet the additional compensating factors required, there are other options. At our company, we have the ability to broker to outside investors that specialize in loans that do not meet the requirements under Fannie and Freddie. Without making this post too long, I’ll just say, the terms of these loans are typically more risky and expensive. For example, they might be interest only, adjustable rate mortgage, and they are simply not as financially efficient in costs. It is my opinion that if your credit is not in such form that you would qualify for a mortgage in the traditional lending atmosphere, in most cases, it is probably best for you to spend some time getting your credit where it needs to be to qualify so that you can take advantage of the more efficient loan products within the traditional lending world.
If you have more questions, or you would like to apply for a loan with us, please feel free to call me at 469-450-2723, or apply online. We change our online application platforms from time to time, so if that link does not work, you can always go to the tab on this blog that says apply today. I look forward to helping you, and talk soon.