According to a number of Wells Fargo Home Mortgage originators, Wells Fargo will now allow an FHA borrower to get a mortgage with a credit score of less than 600.
In exchange for a larger down payment and a lower overall debt load (lower Debt-To-Income ratios), Wells Fargo Home Mortgage currently allows borrowers to take out an FHA loan on a purchase transaction with a minimum credit score as low as 500.
Here are the details as I understand them:
The credit policy change was posted to Wells Fargo Home Mortgage originators on January 14, 2011 and takes effect for purchase transactions using an FHA loan on or after January 15. The new policy will allow minimum loan scores and loan to value ratios as follows:
- A score of < 500 = not allowed
- 500 to 579 = 10% minimum down payment (90% Max LTV) PLUS "additional requirements"
- 580 to 599 = 5% minimum down payment (95% Max LTV) PLUS "additional requirements"
- 600+ = 3.5% minimum down payment
The "additional requirements" for all borrowers with FICO scores < 600 are:
- Lower Debt to Income Ratios. These could be as low as 31% for housing debt and 36% for TOTAL debt.
- 2 full months of "reserves" are required (cash in their bank account AFTER paying down payment and closing costs). The reserves are calculated on the total housing payment, in other words Principal, Interest, Taxes and Insurance (PITI)
- Seller contributions may not exceed 3% of the purchase price
- Gift funds are not allowed to count toward the down payment requirement (for any borrower with a score less than 600)
- Downpayment Assistance Programs are not allowed to count toward the down payment requirement (for any borrower with a score less than 600)
The borrower must also be able to document that they accumulated the required downpayment funds and that they did not come from a gift or from a DAP. They must prove they had the ability to accumulate the funds and documentation proving how they came to accumulate the funds needs to be included in the loan file.
A few final details:
- This is for purchase transactions only.
- This is only CURRENTLY available ONLY from a Wells Fargo Home Mortgage RETAIL lender.
- Pricing adjustments will still be made to the rate. In other words, the lower the credit score, the higher the interest rate will be. You will not be offered the best rate with a low credit score.
What does this mean?
I take this to be a sign of a potential loosening of the credit market in the future. No, credit will still not be as freely available as it was a few years ago, nor should it be. (It shouldn't have been then!) But most analysts agree that almost all lenders went too far to the extreme with requirements putting a near complete freeze on mortgage lending.
A good number of people over the past few years have seen their credit scores slip for a variety of reasons. Some were at one point homeowners and would like to be again. There are borrowers still yet to default, there will still be short sales and foreclosures. With the tightened credit restrictions, buyers just haven't been plentiful enough to make decent headway against the excess inventory in many markets.
If other lenders follow suit, and we see additional lenders adopting similar policies related to easing requirements in one area (such as credit score), at the same time they will likely raise other requirements to compensate (such as down payment, Debt to Income Ratio, Reserves, etc) for the increased risk of default. Although it will take a while for the effects of these easing restrictions to really kick in and have a substantial effect on housing supply and demand (there are other demands that will require time and discipline to get in order), this is definitely a step in the right direction and it shows some responsibility and thinking by those underwriting such loans.
Our typical client has credit in the 700s and 800s and also usually has a substantial down payment, so the credit freeze has not directly affected the majority of our clients. But today's buyers will one day be sellers and their property values and equity positions will fare better as more people qualify to obtain credit and purchase real estate.
If you think you might have credit scores below 600 and are interested in buying a home, call or email and we can refer you to an agent and a lender who can help you out.
If your credit score is higher than 700 and you are interested in a buying a home within the next 90 days, call us today for a free consultation!
- Are you or your company relocating to Utah?
- Are you buying a $300,000-$800,000 home within 90 days?
- Do you have excellent credit?
- Are you making a substantial down payment or paying cash for your home?
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