Of all the parts of the mortgage financing process, credit qualification is one of the most misunderstood.
Through the qualification process, lenders dig through all aspects of the borrower’s financial situation and attempt to assess their ability to repay the loan. The underwriting process builds evidence by looking at all income sources, outstanding debt, and credit history, among other factors.
We have built our business around the idea that knowledge is power, but we will also clarify that knowledge, when incomplete, can be misleading and even harmful. Nowhere is this axiom more true than with credit qualification.
Minimum credit standards differ between lenders, borrowers, loan types, and home builds, among other factors. What’s more, the situation is fluid. Lenders are constantly shifting standards, and potential buyers are constantly encountering new life situations (and dealing with old ones) that may change their credit outlook. What is true today may not be the same as yesterday, and it all certainly won’t be the same as tomorrow.
If you take away any one piece of advice from this credit qualification overview, take away this: don’t disqualify yourself from the couch. We can almost stop the article there. But to better understand the situation, we offer the the following three guidelines:
Point #1: Different Lenders, Different Loan Programs, Different Standards
Different lenders often offer different qualification standards (credit score, debt-to-income, loan-to-value) for the most popular government-backed loan programs (Conforming 30-year fixed and 15-year fixed, FHA, USDA, and VA)
So while one lender advises that the lowest FICO score for the FHA loan is 550, another might not go that low.
What’s more, one 550 FICO score might not be the same as another.
We recently helped a client purchase a home with an FHA loan and a 550 credit score. Our buyer had a heap of student debt, and in searching for adequate employment, making rent, and purchasing necessities, had occasionally lapsed on repayment. When our client prevailed and found a high-paying local job, this person had the ability to comfortably make mortgage payments and remain current on pre-existing debt. The credit score did not reflect the current reality of the situation.
This is our #1 piece of advice: different lenders and different loan programs offer different standards. Bank #1 might list a 620 credit minimum and a 31% debt-to-income maximum, while Bank #2 lists 580 and 40%.
As a mortgage banker and broker, we have access to many lenders, and are able to shop for the most flexible credit scores and debt-to-income ratios on the market. Here are the best terms we can find for you:
FICO Credit Score:
- 550: FHA
- 560: VA and USDA
- 580: Conventional
Debt-to-income (DTI) Ratio:
- 60%: VA
- 57%: FHA
- 50%: Conventional (Fannie Mae and Freddie Mac)
- 43%: USDA
- 43%: Jumbo
And this brings us to point #2:
Point #2: Go Shopping (The Broker Advantage)
Always ALWAYS shop around. In our last example, Bank #1 has stricter standards. But all too often Bank #1 would not refer the borrower to Bank #2. Because why help a competitor?
We have qualified countless borrowers who had “lost hope” or thought they were “unlendable” based on advice given by brick-and-mortar banks:
#1 “This was a painless process; you succeeded where conventional banks failed me.” – Susan Manbeian, Pismo Beach
#2 “I had been trying to refinance with my current lender for 4 months. Your people were able to take my application, process it, find a lender, and close while the former lender was still trying to get their act together.” – Bonnie McIvor, San Luis Obispo.
Again we return to the point: always ALWAYS shop around. The mortgage broker is able to act as an advocate for THE BORROWER and not the bank. They will find a loan that best fits the borrower, rather than vice versa.
Even better, we offer the entire shopping process, professional advice, pre qualification, pre approval FREE. We are not paid until the loan closes.
Which brings us to our third piece of advice:
Point #3: Credit is NOT static
So far we have focused on the lender’s standards, but what of the borrower? The nature of the FICO score and debt in general, is that it never really stands still. As you make monthly payments, your DTI declines. As you continue to pay your revolving credit lines, your FICO improves.
Even a negative credit event as large as a foreclosure or short sale can be overcome in a year. The FHA Back-to-Work program offers financing just 12 months after a negative credit event, given the right situation. See here for our complete guide to minimum wait times.
Take this example. We recently helped a first-time buyer take out a loan and purchase a home with NO PRIOR CREDIT. This client had never held debt of any kind (credit card, auto loan, student loan, etc) to build a credit history and a FICO score.
To build credit quickly, we had our client join a close family member’s account as a co-borrower. By the end of the process, our client got a 30-year fixed conventional (Fannie Mae) loan with just one trade line.
As a borrower, most issues (collection accounts, trade lines, etc.) can be overcome with a little work. However, there are a few major issues that will require more attention. Past-due state and federal tax bills with no payment plan, and past-due child support are major warning flags.
We have put together a general guide for improving your credit score. Check it out. These are general guidelines; you can receive custom tailored advice (free!) for your situation simply by picking up your phone and calling us at 805.543.LOAN or emailing us here.
In reading about credit issues and mortgage finance, you will often see all kinds of minimum qualification terms thrown around. On top of the usual FICO and debt-to-income, you will hear about minimum trade lines, collection accounts, and more.
The simple fact is this: different banks treat different factors differently. Don’t disqualify yourself from the couch and come to the conclusion that you are “unlendable” without talking to a loan officer. This is a free service from a financial professional, and you may be surprised to learn just how much is possible.
Central Coast Lending is a California mortgage broker and direct lender based on the Central Coast of California in San Luis Obispo County. Call us today at 805.543.LOAN or email us here to set up a free pre qualification. We are The Mortgage Experts: ask us anything!