Credit Scores Used By Lenders To Qualify For Mortgage
This guide covers what credit scores used by lenders to qualify for mortgage loans. Let’s take a mortgage case scenario on what credit scores used by lenders to qualify for mortgage. Say Mr. and Mrs. Jones are married, and they are first-time home buyers. They need to qualify for a mortgage loan. They both have jobs and want to purchase a modest home. They know their mortgage lender told them they would need a minimum of 640 FICO to qualify for a mortgage loan. The 640 is not HUD guidelines on credit score requirements. The minimum credit score requirement to qualify for a 3.5% down payment FHA loan is 580. This lender is asking for higher credit score requirements. This is because they have lender overlays on credit scores. What credit scores used by lenders to qualify for mortgage and do they go by? Which credit reporting agency does the mortgage lender choose? In this article, we will discuss the credit scores lenders use to qualify for mortgage.
Credit Scores Used By Lenders To Qualify For Mortgage From Credit Bureaus
There are three credit reporting agencies:
- Transunion
- Experian
- Equifax
Which Scores Are Used As Qualifying Credit Scores
Mortgage Lenders pull tri-merger credit reports on all mortgage loan applicants, a credit pull from each of the three credit bureaus. The credit score used as the qualifying credit score is the middle credit score. If there is more than one borrower such as multiple co-borrowers, then the middle credit score on the borrower with the lowest middle credit score is used.
Multiple Borrowers
On the above example, Mr. Jones will have 3 credit scores and Mrs. Jones will have 3 credit scores for a total of six credit scores.
So, which credit scores will the mortgage lender calculate? The credit score the mortgage lender will go by is a simple two-step analysis. It will be illustrated in the following example. Let’s take this scenario for Mr. Jones: Mr. Jones’s Transunion credit score is 720 FICO. Mr. Jones’s Experian credit score is 630 FICO. Mr. Jones’s Equifax credit score is 540 FICO. Now, what is Mr. Jones’s middle credit score? Mr. Jones’s middle credit score is 630 FICO because the 630 credit score is between 720 and 540. For Mrs. Jones: Mrs. Jones’s Transunion credit score is 650 FICO. Mrs. Jones’s Experian credit score is 640 FICO. Mrs. Jones’s Equifax credit score is 630 FICO. What is Mrs. Jones’s middle credit score? Mrs. Jones’s middle credit score is 640 FICO because the 640 FICO falls between a high score of 650 and a low score of 630.
Qualifying Credit Scores Used By Lenders To Qualify For Mortgage
Mortgage lenders will go by the lower of the two borrower’s middle credit scores. In this case, Mr. Jones’s middle credit score is 630 FICO. Mrs. Jones’s credit score is 640 FICO. The minimum credit score requirement for this mortgage lender is 640 FICO. Mrs. Jones qualifies. This is because her middle credit score is 640. Mr. Jones does not qualify because his credit score is 630 FICO. In this case scenario, these mortgage loan applicants do not qualify for a mortgage with this lender. This is because this lender will use Mr. Jones’s 630 credit score since he is the lower of the two middle credit scores. The lender’s minimum credit score requirement is 640 FICO.
Fannie Mae Averaging Credit Scores Used By Lenders To Qualify For Mortgage With Multiple Co-Borrowers
Great news for borrowers with multiple co-borrowers on conventional loans. If a borrower has co-borrowers, Fannie Mae allows the borrower and co-borrowers middle credit scores to be averaged. This is a good thing for one of the borrowers if they do not meet the minimum 620 credit score requirement on conventional loans.
If the main borrower had a 600 FICO and the co-borrower had a 700 middle credit score, Fannie Mae allows the main borrower and co-borrower to average their middle credit score. In this case, averaging the 600 and 700 middle credit scores yields a 650 FICO.
The borrower and co-borrower will qualify for a conventional loan since the average 650 credit score is higher than the 620 FICO required to qualify for a conventional loan. Regarding pricing, the lender will price the rate on the lower middle credit score borrower, which is 600. Pricing on rates will not be based on the 650 average scores. This holds true and vice versa: if the main borrower’s credit score was 700 and the co-borrowers score was 600. The credit score will be average among all borrowers, co-borrowers, and vice versa.
Credit Scores Used By Lenders Meeting The Minimum Credit Scores
In the example above, there are several solutions. The first solution can be where Mr. Jones is not on the loan and have just Mrs. Jones on the loan. Mr. Jones can be on the title after closing the loan. One problem this causes is that if Mr. Jones is not on the loan, his income cannot be calculated in calculating the debt-to-income ratio. They are in business if Mr. Jones’s income is not necessary for meeting the minimum debt-to-income ratio. If they need Mr. Jones’s income to qualify for the loan, we must go to option # 2.
Credit Scores Used By Lenders To Qualify For Mortgage With No Overlays
The second option is to get a different mortgage lender with lower credit score limit guidelines. Consult with a lender with no overlays. There are many lenders with no overlays on credit scores. Another solution is to try to increase Mr. Jones’s credit score. Boosting his credit scores may be simple such as paying down credit card balances or getting additional secured credit cards. Mortgage Loan Applicants who need to qualify for a home loan with a lender with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
