LENDER: “We require a minimum 640 FICO score to extend a mortgage. And at 680, you’ll get a better interest rate.”
What they didn’t tell you, is that you could qualify for a conventional or FHA loan with even a 620 score. The declining lender either has an “overlay” (which means their conventional loan risk tolerance is less than other lenders), and/or they just don’t offer FHA loans.
There are many national, reputable wholesale lenders who will underwrite standard FHA mortgages at a 580 credit score – and will even accept a lower credit score if you have at least a 10% down payment.
But – What if you:
For nominal cost, a credit agency can run a sensitivity inquiry to quickly tell you which credit cards need to be paid down and by how much – before a credit bureau increases your score. Once you receive a statement from your creditor evidencing your pay-down, send it to the credit bureaus for a credit score adjustment (but this can easily take 30-60 days).
Alternatively, you could work with a reliable credit agency to expedite this process (usually no more than 5 business days). Under this “Rapid Rescore” process, you are notified once your improved scores are posted, and a new credit report could then be presented to your lender so that you can get on with your mortgage!
Here’s the Point: After paying down a credit card, there are “Rapid Re-Score” programs to arrange for the credit bureaus to adjust your credit score within 5 business days.
LENDER: “Because you live at your parents' place without a lease and without having a prior mortgage, we cannot offer you an acquisition loan.”
If the above statement was the lender’s sole reason for declining your mortgage, then it is in contravention of the General Guidelines for Analyzing Borrower Credit per the U.S. Department of Housing and Urban Development (HUD). According to HUD, the lack of credit history (or a borrower’s decision not to use credit) may not be used as the basis for rejecting a loan application.
However, if, for example, in addition to no housing history:
… then you are not likely to get a conventional or FHA loan!
POSSIBLE SOLUTION: You might still be able to get a mortgage approval if you can demonstrate that you have been consistently contributing to household expenses – thereby, in effect, helping with your parents’ mortgage. Although it is always better to make payments by check (to more easily track your contributions), even cash payments can be acceptable support – in the case where your withdrawals can be matched to deposits in your parents’ bank statements.
Other compensating factors include showing that you have a consistent pattern of payments for utilities, vehicles, or insurance.
Here’s the Point: If you do not have any recent rent or mortgage payment history, then you will need to be patient and creative to get a mortgage.
LENDER: “I’m sorry to say that your loan request has been declined. We just couldn’t get a green light from the software program we use.”
YOU: “So I was declined by a computer?”
LENDER: “Well, sort of. You had several factors working against you including your credit score, some late payments, and the fact that you wanted to minimize your down payment.”
The above exchange actually happens more than you would expect. The explanation, while not very helpful, is actually about the best you will get – because the workings of the algorithms used in this standard mortgage software are unknown to almost everyone in the industry, except those who designed it.
There are two programs used by lenders to qualify their borrowers for conventional or FHA financing: Desktop Underwriter (DU) or Loan Prospector (LP). DU is required by the Federal National Mortgage Association (FNMA or Fannie Mae), and LP is required by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). And, Fannie Mae and Freddie Mac, government-sponsored enterprises (GSE’s) founded by Congress, are the ultimate buyers of your mortgage. Without getting a green light from one of these programs, your loan may be declined.
Avoid these factors to maximize the probability of getting a DU “Approve/Eligible” or an LP “Accept” finding:
► Loan-to-Value ratio > 80%
► Debt-to-Income Ratio > 43%
► Low Down Payment & Cash Reserves
► New Credit Cards with Low Borrowing Capacity
► Credit Score < 640
► Late Payments/Collections
► Limited History of Mortgage/Rent Payments
► Several Credit Inquiries
Here’s the Point: Without an “Approve/Eligible Finding” from Fannie Mae, you aren’t likely to get a conventional or FHA mortgage – and you may need to call a portfolio or private lender.