Here is what most banks and mortgage companies will not tell you. If you have a bad credit score they don’t want your business. It’s the truth. Every financial institution wants borrowers with good credit, a healthy down payment, a stable job and low manageable debts.
The reality is that most people don’t fit the typical box. The key is to work with a lender willing and able to complete your loan. The takeaway factor here is willing. If your financial picture isn’t good that does not necessarily mean you cannot get a loan. What it means is you might not find a lender willing to make a loan because of the risk. One of those forms of risks that is a big hot button with financial institutions is credit. A credit score is the best representation of how likely you are to have a payment default in the next 30 days. The lower your credit score the more likely of this payment default increases.
Most lenders have a credit score requirement of at least 620 for a conventional loan or higher and the same for an FHA loan. There are some big-name banks and lenders who promote their ability to get your mortgage done with a less than 620 credit score however the red tape associated with it can be quite intense to say the least. Here is where this comes into play.
Lenders look at credit scores in the form of buckets. For example, here is a following bucket you might fit into based on your particular credit score…
600-619 is a bucket
580-500 is a bucket
540- 570 is a bucket
Watch out for banking restrictions due to a low score
Depending on the financial institution that you’re working with they may or may not have an ability to get your mortgage approved with a low score. Watch out for overlays. Overlays in mortgage terms are additional credit requirements the bank will place on you because of your credit score. Effectively it’s really to cover their own due diligence. Note overlays benefit the bank only not you.
Should your score be less than 600 your loan might not pass automated underwriting. Automated underwriting is the algorithm all lenders use to make sure your loan is deliverable to Fannie Mae or Freddie Mac. If your loan does not pass on automated underwriting your file may be downgraded to a manual underwrite where a human underwriter reviews your file. Manual underwriting has very rigid credit requirements such as housing ratio at 31% and a debt to income ratio at 43%. Simply put, in such a scenario up to 31% of your income could go towards housing and 43% of your monthly income would have to support your housing payment and any other monthly reoccurring obligations. As your credit score continues to slide down the need for you to have more skin in the game and stronger other factors come into play.
Should your desired loan amount exceed $424,100 depending on your market that loan would be considered High Balance. High Balance loans become even pricier due to lower credit scores.
Ultimately if your credit score is under 620 you should plan on securing an FHA Loan and having access to at least 3.5% down payment. This will ensure you have greatest likelihood of success in actually closing on a home.
How to pick a lender to handle your mortgage
Ask the bank if they have the ability to do mortgages for borrowers with less than 620 credit scores. Ask them specifically what sorts of credit requirements they have in such scenarios. Finally, make sure to ask them the most important question. “Mr. lender, how able and willing are you to help me get this mortgage knowing what you know about my file?” If that bank or lender cannot clearly and accurately articulate a good reason why you should work with them move on. You want to work with the lender who understands difficult credit scenarios, and knows their loans. Most borrowers would be astonished at the lack of knowledge most mortgage professionals have about their craft when it comes to the tough ones.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.