Many people have Low FICO Credit Scores. In 2008 the Mortgage and Real Estate industry suffered a complete meltdown. There were many reasons why and I feel confident any homeowner that watched their property values plummet and maybe even had to endure the humiliation of a Foreclosure, a bankruptcy, short sale or Deed in Lieu of Foreclosure have pretty strong opinions of why and the truth be known most of the opinions would be correct. For Homeowners this was not a happy time and many people suffered. There have been many changes since 2008 and now the Mortgage business may be one of the most regulated businesses to be a part of. Regardless of the business side of Real Estate and Mortgage Loans there are thousands of Americans that currently have low FICO scores. For the sake of clarification lets say Low as in FICO scores of 620 or below. There is a plethora of Americans that have FICO scores of 620 or below and feel like they are permanently lost and may not qualify for another home. The Larry Stepp Team at Gustan Cho Associates field many questions and frustrations over this dilemma. Take Heart because according to FHA Minimum Guidelines a borrower can qualify for a FHA Loan with a 580 FICO Credit score with only 3.5% down payment. Yes ! This is a true statement. If that is not good enough I can personally tell you that a FICO credit score does not define you and further you can improve them. Good advice and discipline is key to your new homeownership adventure. Here is a link that you may find helpful for those with credit scores under 620.
Many of the questions and calls we field are from borrowers who have been turned away and been told I am sorry for you to qualify you have low FICO Credit Scores. Going a step further these borrowers have been led to believe 620 is minimum higher is better, this part has some truth to it but it does not explain. How can The Larry Stepp Team at Gustan Cho Associates assist when another lender or broker cannot? Simply put we do business with no overlays. What are overlays? Overlays are a more stringent rule or policy above what the FHA minimum guideline is. An example of this is the FICO scores. Many lenders will not do business with a borrower if they have FICO scores below 620 realistically most lender will require a FICO score of 640, this is a lender policy that is more stringent than the FHA minimum guidelines. Another FHA Guideline that many lenders are more restrictive on is old unpaid charge offs or unpaid collections on your credit report. Many lenders will require they be paid before they will qualify you for a FHA mortgage but according to FHA minimum guidelines old charge off accounts or unpaid collections on your credit file do not have to be paid. In fact once they are paid they are reopened and become new and will reflect on your credit file. These additional more restrictive guidelines are lender guidelines and perfectly legal but they are called overlays. My Team of professionals and associates DO NOT have overlays. We only follow the minimum guidelines set by FHA.
When borrowers asks their local banker ” Can I Qualify For FHA Loan with low FICO credit scores under 620 Credit, the banker’s response is NO. Most of them do not reply that you do not qualify with our bank but you may qualify with another lender that has no lender overlays on credit score. Most lenders do not explain to the borrower who visit or contact them that FHA minimum credit score requirements is 580 FICO. It is a shame that there are folks out there who meet the minimum FHA Guidelines on credit scores but are told that do not qualify by lender after lender and these lenders do not tell them that they do not qualify with them but may qualify somewhere else. 70% of my borrowers are borrowers who were told that they do not qualify or were denied for a loan at the last minute due the lender overlays by their lender.
I do not mislead clients and I want to tell the the whole story, having low FICO credit scores less than 620 does present obstacles for the borrower. We make every attempt to help our clients beyond obtaining them a mortgage, no extra cost from us it is part of what you get with The Larry Stepp Team at Gustan Cho Associates. We will help them improve their credit scores and many times there are quick little fixes that will immediately improve their FICO scores, simple things like paying down a credit card. Maxed out credit cards even when you are making minimum payments on time do not fare well for improved credit scores. Keep them below 40% of maximum and better yet, pay them off each month. Another is adding themselves to a family member and/or close friend as an authorized user or getting a secured credit card. Many people, myself included after 2008 paid their cards off and cut them up, that was so relieving to me but it did not help my Credit scores. When qualifying for a mortgage lenders want to see you have managed credit lines, these are referred to trade lines. Having zero trade lines actually hurts your credit so obtaining a secured credit card and paying it monthly will immediately see your FICO scores improve. Another tip when qualifying for a mortgage is managing Debt to Income (DTI). If a borrower has FICO scores of less than 620 the maximum DTI allowed is 43%. This can really play into your new home purchase for example:
Yearly Income: $46,000 breaks down to $3833.33
Car payment $465.00
Motorcycle Payment $125.00
Credit Card payment $60.00
Calculating the above debt = $650 before rent or house payment. / Do the math and the debt alone represents 16.9 %. Going a step further if your FICO is at 620 or less then the maximum DTI allowed including house payment is 43% this leaves 26.1% for the house. What is 26.1% of $3833.33 (monthly income) ? $1000.49 for principle, interest, home insurance and if there are any HOA fees. Where am I going with this? Can you live without the motorcycle payment? (I am a HUGE motorcycle enthusiasts) Can you reduce the Credit card debt and pay it down. In this example paying down the credit card and considering the value of the motorcycle to your long term goals may be into play. If those two debts were not existent or paid down in this example they are better postured to purchase. The Larry Stepp Team will spend time walking through this with you and not rush you away. We are in it to win it for you! If your FICO credit scores are 620 or higher, then the back end debt to income ratios allowed are 56.9% of DTI on the automated approval per Automated Underwriting. Borrowers with high debt to income ratios want to try to get their credit scores to at least FICO 620 and try again.
Another major issue with having credit scores under 620 FICO is that the Automated Underwriting System may ask for Verification Of Rent which is proof that the borrower has paid their monthly rent payments with either a bank check and/or wire the funds from their bank account to their landlord. If paid with a check, then the lender will require 12 months canceled checks and the renter cannot have been late with their rental payment in the past 12 months. If the renter has paid their rental payment via bank wire to their landlord, then 12 months bank statements will need to be provided where it shows the monthly rental payment being wired out of their account into the landlord’s bank account. If the renter has paid their rental payment with cash and gotten a cash payment receipt payment by their landlord, that does not count and is not considered proof of rental verification. Borrowers who have credit scores under 620 FICO and the automated approval conditions for rental verification and they cannot provide it cannot qualify for a FHA Loan because they need to meet all of the conditions of the Automated Underwriting System. This ends up hurting home buyers who are living with family trying to save their down payment money for a home purchase. When this happens, your loan officer should be able to guide you in boosting your credit scores to at least 620 FICO where the AUS will not require verification of rent.
As mentioned you can qualify for a FHA Loan with FICO scores under 620. There is very large percentage of borrowers that have had life situations that have affected there FICO Credit Scores, even so potential homeowners/borrowers with FICO score under 620 will have adverse affects. Other than a lower DTI qualifying standard of 43% compared to 56.9% you will be required under the Automated Underwriting system to provide verification of rent (VOR). The Automated Underwriting System may also require one months PITI (principle, interest, taxes and insurance in reserves. Reserves can be gifted, FHA does allow 100% gift funds from family members to gift borrowers. However, gift funs are NOT viewed favorable and there are times when the Automated Underwriting System may not allow the gift funds if FICO scores are below 580. FHA borrowers with FICO scores less than 620 will not get the best rate, paying a higher interest rate on a FHA Loan even though it is insured by the U.S. Department of Urban Development.
We mentioned a few of these tips earlier and by following this advice your credit scores will improve in a short period.
Many consumers pay their bills on time each month but have no tradelines so their is no 12 month payment history reported to the credit bureaus. These consumers often have lower FICO credit scores than they really should but because there is no point of reference to the credit file they have low FICO credit scores. Adding themselves to a family members card as an authorized user will instantly improve their credit scores. One last tip here and it is important, make sure the person who is adding you as an authorized user has solid payment history and keeps a low credit card balance. A large credit card balance or late payments will harm you, completely destroying the whole reason for the credit card (tradeline).
Secured credit cards are the easiest and fastest way of boosting Low FICO credit scores. Many American consumers have poor credit and recently have gone through a bankruptcy and or a foreclosure. These consumers are perfect candidates for secured credit cards to rebuild credit and reestablish their credit foundation. Keep in mind when getting a secured credit card to get at least a $500.00 credit limit, preferably a $1,000 limit credit card for maximum optimization. The better for you the higher the maximum limit. Adding a secured credit card provides a much needed tradeline and has potential to boost your personal FICO credit scores 20 to 60 points.
FICO 620 holding you back from the American Dream?
Do you have the American Dream of home ownership in mind? Have you been told you do not qualify for a FHA Loan because you have low FICO credit scores 620 or below? You are being told a half truth, yes the lender will not qualify you for a FHA loan because of the overlays their institution have. These more stringent and restrictive policies are not FHA minimum guidelines, so you may not qualify for a FHA loan at Acme Mortgage but with the Larry Stepp Team at Gustan Cho Associates we have no overlays.
The Larry Stepp Team at Gustan Cho Associates is available 7 days a week, holidays and weekends.
Larry Stepp 407-922-4755 LarryS.HomesNetwork@gmail.com