500? 620? 740?
What is the minimum credit score needed to get a mortgage? There’s a lot of disconnect between the “official” requirements and the scores that actually get people approved for home financing. Articles online show minimum FICO scores ranging from 500 to over 700. What gives?
No Hard and Fast Rules
Fannie Mae, for example, allows a credit score as low as 620 if you are willing to pay the risk-based surcharges and put up a large enough down payment. Don’t expect a client to get approved with a 620 score with no assets and a small down payment, however.
When your client applies for a Fannie Mae mortgage, their application is examined electronically by Desktop Underwriter software, and the result is either “Approve,” “Refer” or “Refer with Caution.” When their credit score is not high, they are unlikely to get an “Approve” rating unless everything else in their application is cement-solid.
A “Refer” grade kicks the application out for manual underwriting, and their credit history and other factors are examined more closely. If their credit problems have been resolved and were not their fault, and their down payment, income and assets are solid, they may be approved. A “Refer with Caution” grade is virtually impossible to overturn. Identity theft victims may be able to bypass a “Refer with Caution,” but almost no one else can. Freddie Mac’s Loan Prospector software works in a similar fashion.
Jumbo or nonconforming lenders make their own rules. In general, however, they are at least as stringent as Fannie’s. Finally, loans requiring mortgage insurance (those with less than 20 percent down) come up against higher minimum credit scores – from 660 to 760.
Minimum FICO for an FHA Mortgage
The FHA works a little differently. The Department of Housing and Urban Development (HUD) says that consumers can get an FHA mortgage with 10 percent down and a 500 FICO, and only 3.5 percent down with a 580 score. But it’s rare for applicants to get an actual home loan from an actual mortgage lender with those scores. The median credit score on FHA purchase originations increased from 625 in 2007 to 690 in 2013, while the lowest 10th percentile has increased from 550 to 650. Statistically, your client’s chance of getting approved for an FHA loan with a FICO of less than 580 is about 2 percent.
Lenders Have the Last Word
FHA lenders may require minimum scores ranging from 600 to 680, even though the FHA’s own guidelines are more flexible. Fannie and Freddie lenders also get to use their own discretion and frequently impose more stringent restrictions. This practice is called a “lender overlay.”
Why Overlays?
Don’t the FHA, Fannie and Freddie protect the lenders against losses? Yes, FHA-approved lenders are protected by mortgage insurance in the event of borrower default. Fannie and Freddie lenders sell the loans to investors and are off the hook because they no longer own the loans.
However, FHA lenders could lose their FHA approval if too many borderline borrowers don’t pay their mortgages – even if those loans were underwritten in exact accordance with FHA guidelines. FHA loans make up a large part of many lenders’ business, and no lender wants to lose its approval. That’s why lenders add requirements to minimize the chance of mortgages going into default.
Fannie and Freddie can force lenders to buy back loans that go sideways if every tiny detail of their procedures isn’t followed. Lenders prefer to minimize the chance of an expensive buy-back by making their underwriting guidelines more stringent than necessary.
Guidelines Relax as Rates Rise
One reason that lenders have been so hard on applicants is that they had more business than they could handle when mortgage rates were very low. Therefore, there was no reason to accommodate less-than-perfect applicants. As rates rise, though, lenders lower their standards somewhat. Median credit scores of approved mortgage applicants have begun to come down during the second half of 2013.
Contact More Lenders
For would-be homeowners with scruffy credit scores, the best solution right now is to simply contact a lot of mortgage lenders. Sites like LendingTree.com make it easier to get in touch with many companies in a short time.
Gina Pogol spent more than a decade in mortgage lending, originating, processing and underwriting home loans. She has written about mortgage and finance issues for a number of publishers since 2006.
Currently a senior marketing manager with Lending Tree, Gina advocates for consumers and loves answering their mortgage and personal finance questions.