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May 26, 2020
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The credit score it takes to get a mortgage

By: Scott Sheldon
September 7, 2018

To buy a house you need to have at least a good credit score, provable income that supports your ability to repay the mortgage as well as sufficient reserves and a to use for a down payment. If you’re looking to buy a house here’s what you need to know if your credit needs tender loving care

Whether buying a home or refinancing a home you already own most mortgage companies have a minimum credit score requirement. Conventional loans require a 620-credit score. FHA Loans which are loans insured by the Federal Housing Administration have far less tight credit requirements as many banks and lenders have a minimum credit score requirement of 620, some offer FHA Loans as low as 600 and some believe it or not at 580.

If you have a mortgage lender that’s willing to do your mortgage credit score with a less than 580 score you have a diamond in the rough as most banks want loans that are quicker to the green and are not interested in working with folks who need a little bit more attention. Unfortunately, that’s just the truth.

If your credit score is 580, your file will need to pass automated underwriting, that means any previous debts, old collections that still have balance, old skeletons in the closet of any kind are going to have to be zeroed by close of escrow. Also, in such situations the debt to income ratio is far more important than it is if their credit score was in the 620 or higher range. It’s not unreasonable to think that a 580-credit score would contain a minimum debt to income ratio requirement of 45%.

So, what happens when your credit score is below 580 and you’re still looking to purchase a home or refinance a home? That’s where things get interesting. Income, down payment and at least two months of mortgage payments in the bank and equity in your home would become far more important to have.

Such anchors are called compensating factors in the lending industry-good things to offset negative things. Here’s an example of a situation a pragmatic bank would look at $300,000 loan, Cash out refinance, owner-occupied house with 40% equity in the property 550 credit score with 6 months of mortgage payments in the bank and W-2 wage earner type scenario. A bank that would do a loan with a 580-credit score probably would entertain that type of scenario as well too-perhaps on an exception. It is worth investigating.

So, when you’re looking for a mortgage with less than a 580-credit score ask them what their minimum requirement is? If it’s less than 580 ask them if they ever closed a loan for a borrower with a less than 580 credit score and if yes in what type of circumstance? Ask them if an exception can be made? Many banks might be willing to make an exception if they have a low credit score requirement. Anyway, something to think about when purchasing or refinancing a house.

 

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.