- Credit scores, primarily FICO scores are the predominant method of making a CREDIT decision on a mortgage loan applicant. Some loan programs rely specifically on the credit score, such as:
- Alt-A or Expanded Criteria Loans: These are loans for people who can't verify income or employment
- 80/20 loans: programs to buy a home with no downpayment
- Sub-prime or Non-prime loans: programs for people with less than perfect credit
Note that what is missing from the above bullet-points are the majority of mortgage programs written in the USA:
- FHA - government insured loan which only requires 3% down-payment. There is no score requirement
- VA - government entitlement for qualified veterans. Credit scores are not required
- Fannie Mae conforming loans - Fannie Mae empowers lenders and brokers through computerized underwriting which looks at credit history but does not specifically require a credit score. There are SOME conforming loan programs or features which may require a specific minimum credit score, but this again is not the mainstream of what is available
- Bank Portfolio Loans - Banks are required by the federal government to lend money to first-time homebuyers, people with lower household income than the average household, etc. The banks must lend to these specific borrowers to meet federal requirements and credit scores are largely ignored or at least are not a barrier to financing
There are several great blogs on Active Rain about how to FIX your credit or INCREASE your score:
What I want to get across today is that no credit scores is really not an indicator of credit worthiness.
MYTH - "Having no credit scores or being someone who just uses cash will hurt me because most lenders assume that no credit history is the same as bad credit history"
FALSE - Lenders realize that credit history is really an indicator of your ability to manage debt. It shows your willingness to pay your obligations. Assuming someone with no credit history is an unworthy credit risk is like saying someone who hasn't taken a history test is the same as someone who failed it. If you haven't tested, you haven't missed any questions either!
TRUTH - Few adults have NO credit history. If you are reading this blog where you live then you must have electricity. Do you pay rent to live there? Was that your cell phone that just rang? Lenders can use all kinds of non-traditional credit to establish your past willingness to meet financial obligations:
Rental history by verifying with your apartment management company or by having you provide us 12 months of cancelled checks or money order receipts
Cell phone bill payment history which we verify from your service provider
Utility bill payment history which we verify from your utility company
Automobile insurance payment history which we verify from your insurance company
Any other regular payment you have made for 12 months or more.
Consider that No Credit Score is just as good in most cases as Good Credit Scores. For more information about credit visit http://www.myfico.com/ which is the only source for obtaining your credit report WITH the FICO scoring method to know the scores your lender is going to use.
©2006 Ken Stampe
Ken Stampe is a Mortgage Loan Originator, Mortgage Author and Mortgage Loan Officer Instructor living in Dallas, TX. Ken provided his first client a mortgage loan in 1996 and writes about home buying and mortgages to help clients make smart home mortgage loan decisions. Contact by email at Ken@KenStampe.com
What resource do SMART home buyers use?... Mortgage Calculator Bank.com
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