Minimum Credit Score Needed for FHA and Conventional Mortgages
What credit score do you need for a mortgage? That's a tricky question, because borrowers must contend with both "official" guidelines and unofficial guidelines. First, you need to understand what a "representative" or "underwriting" credit score is. Most people have a score from each of the three biggest credit bureaus -- Equifax, TransUnion and Experian. But which one is the "representative" score? To determine this, lenders usually pull a "tri-merge" credit report, which contains the scores from all bureaus. If there are three usable credit scores, the middle score is the representative score. If there are two usable credit scores, the lower score is used for underwriting, and if there is only one, that's of course the only one used.
The Official Minimums
FHA loan requirements are set by federal law. These minimum guidelines include two credit score thresholds. First, applicants must have FICOs of at least 500 to be eligible for any FHA mortgage. In addition, those whose scores range between 500 and 579 are required to make down payments of at least ten percent, while borrowers with higher scores only need 3.5 percent down. FHA borrower must not be listed on the government's CAIVRS database -- the names of those who are delinquent on amounts owed to the government -- or they are not eligible for financing.
VA and USDA
Both agencies also check CAIVRS to determine borrower eligibility for government-backed mortgages. The VA does not set a minimum credit score. Instead, the agency requires lenders to review the entire loan profile to make an underwriting determination. The USDA follows a similar procedure when underwriting its Rural Housing loans. It states there is no minimum score, but these factors make an applicant's credit "unacceptable."
- More than one 30-day late within the past 12 months
- Bankruptcy or foreclosure discharged less than 36 months
- Outstanding judgments within the past 12 months
- Two or more rent payments 30 days late within the past 3 years.
- Outstanding collection accounts with no payment arrangements
- Outstanding tax liens or delinquent federal debt with no payment arrangements
- Accounts converted to collections in the past 12 months.
Fannie Mae and Freddie Mac
These two government-sponsored enterprises (GSEs) buy mortgages from private lenders, package them into securities and sell them to investors. For the investors' sake, the GSEs require that every loan they buy conforms to a set of guidelines. These guidelines specify that borrower credit scores must be at least 620. There are exceptions for those without "usable" scores, either because they have too little credit history or because their reports and scores have been compromised.
Those who can't put at least 20 percent down on their home purchases or refinance with at least 20 percent home equity must also pass muster with mortgage insurers. Government mortgages are insured by the government agencies that oversee them, like the FHA, VA or USDA. Conventional (non-government) loans are insured by their lenders or by mortgage insurance companies. These companies create their own credit score requirements. A few years ago, mortgage insurers increased their minimum FICOs to over 700 in many cases. They have slowly come back down over time. Genworth, one of the largest insurers, has dropped theirs back to 620, just like Fannie Mae and Freddie Mac. It's important to understand, though, that insurers and GSEs can have different requirements.
The Real World and Lender Overlays
Minimum official requirements often have little bearing on actual loan approvals for a couple of reasons. First, while many programs allow low credit scores, they don't allow the chief cause of low credit scores -- too much derogatory credit history, like late payments, collections or bankruptcies.
Second, lenders don't wish to lose their approval to fund government or GSE loans, and if they have too many defaults, even if they have underwritten every single loan per agency guidelines, they could lose that approval. Lenders try to protect themselves by creating guidelines that are tougher than the established minimums to decrease their chances of having to buy back loans or losing their agency endorsements.
Wells Fargo, for example, recently made the news when it dropped its FHA minimum credit score requirement from 660 to 620 -- that's still 40 points higher than the FHA official minimum.
FHA Closings and Credit Score Statistics
FHA loan requirements don't force applicants to have credit scores above 580, but almost all borrowers who get actual loan approvals have much higher scores. Over 97 percent of all FHA loan approvals went to applicants with scores above 620.
Here's the breakdown of approved FHA loans by credit score for the 4th quarter of 2013:
Credit Score Percentage of Loans
Those without usable credit scores (manually underwritten loans) made up .29 percent of all approved FHA mortgages.
No Credit Score
All agencies and the GSEs address applicants without usable scores. Those with too little credit to generate a score and those whose credit reports are extremely compromised by identity theft can still be approved for mortgages. Their loans must be underwritten manually by humans instead of through automated underwriting systems, and their credit must be deemed acceptable.
For those with credit blemishes or poor credit scores, they may be able to secure loan approval anyway, if:
- The event(s) causing the bad credit were beyond the borrower's control, such as expenses due to a catastrophic illness, the death of the primary wage earner, or economic problems stemming from an employer going out of business or closing a factory.
- The event must be temporary. A permanent illness, while not the fault of the applicant, may not allow him / her to afford payments on a new mortgage.
- The event must have been resolved. The laid off applicant must have found a new job, preferably in a more stable company, industry or location.
Finding a Loan
Applicants with credit issues will probably have to contact more lenders to find one that will approve them. They should ask every lender they contact if there are overlays and what they are, or simply work through a marketplace like LendingTree.com. They can simply complete a form, indicating their credit score, and wait for willing lenders to contact them. They can also try LendingTree's LoanExplorer, inputting their credit score and type of loan, and see how many offers pop up.
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