|Three credit scores no longer needed for mortgage lending
The standard set by the lending industry is that three credit scores are needed for obtaining a mortgage. Reality? That requirement is no longer the benchmark.
Securing a mortgage without three credit scores is doable, and here’s how:
• Credit score per bureau: The basis for how lenders view the credit, is the degree of likelihood of a delinquency on a credit obligation in the next three months. The higher the credit score, the default likelihood drops, while the lower the credit score, default likelihood rises. Simple enough, right?
Lenders still use the credit score model developed by Fair Isaac’s & Co., often coined FICO score. Fair Isaac’s is the lending standard in the area of credit reporting. Your creditors – credit card lenders, mobile phone companies, auto lenders, mortgage companies, etc. – report to the credit bureaus monthly on how well you’re doing in maintaining your credit. Some creditors might report to all three credit bureaus, and others may report to only one or two bureaus. Commonly, the bigger the credit obligation and the more importance on repayment of that debt obligation, the more likely creditor would report to more than one bureau.
Each bureau provides the mortgage company one credit score, and it’s the three scores that lenders use when qualifying a borrower for mortgage. There is a high score, mid-score and a low score. The mid-credit score sets the threshold for qualifying.
• When borrower does not have three credit scores: Expect a discovery process and be ready to explain your credit history. If you don’t have three scores, that alone will not deny your ability to secure mortgage.
Lenders have standard lending guidelines set by Fannie Mae and Freddie Mac. Mortgage companies set individual company specific guidelines essentially their interpretation of the guidelines set by the aggregators (Fannie and Freddie). That means it is possible your lender may require you to have three credit scores because of their credit thresholds they must abide by – above and beyond the standard rules. In such a circumstance, three credit scores could be required by that individual mortgage company, whereas another mortgage company might not have these conditional requirements allowing a consumer to secure a mortgage with only one or even two credit scores-still the lower of the two is king for qualifying.
• A lender will review your credit, including length of open credit, explanations on collections and derogatory items if any, as well as any of the big red flags like bankruptcy, short sale or foreclosure.
• More emphasis will be placed on your income, liabilities, assets and debt to income ratio as compensating factors (stronger in one area vs. weaker in another). If your lender denies your loan because you don’t have three credit scores, find a lender who will sign off on less than three scores.
* Remember you will need a minimum of at least 620 to get a mortgage. Gone are the days where utility statements and other sources of non-traditional credit are used in lieu of a credit score. This goes for a conventional loan and/or an FHA loan. If you don’t have a credit score, put the brakes on the mortgage qualifying process until you can establish credit history which will subsequently generate a healthy score over time.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.