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Credit scores - FICO scores for mortgages - I need a 700 credit score?

By Jeff Belonger

Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

September 15, 2009 02:18 AM

Credit crunch

Yes, credit guidelines have gotten tougher, but NO, you don’t need a 700 credit score.

Here we go again, with realtors making things sound semi easy. There was a question on Trulia last week, and the buyer said that they heard that you needed credit scores of 700. And what do you do if you have scores from 614 to 620.

can you handle the questions?

Here was part of the answer from a realtor answering the question.

"You can actually purchase a home with a credit score in the 500'sdepending on job history, etc. I have several lenders who can assist you."

Sorry, but this answer sounds easy, and it's not that easy if you are under 620. Yes, there are investors out there that are allowing credit scores below 620, even down to 535. But the guidelines are much stricter. You really can't exceed the income ratios, your job history needs to be good, and your credit still needs to be decent and conform to the FHA guidelines.

Keep this in mind, even though it could be done, at what cost to you? Does your loan officer explain this to you and break this down? The rates and or add ons for lower credit scores are much higher also. And if loan officers and or realtors say, don't worry, you can refinance later, then WORRY !!!

refinance options

Let's quickly review your refinance options.

You can only do a rate and term within the first 12 months after you purchase your home. If you want to pull any equity out, on a normal refinance, you need 12 months or more.

Let's say rates are now 5.50% with zero points, with a 620 credit score. You currently have a 585 credit score and because of this, your current rate is 6.25% and it's costing you 1 1/2 points. (yes, this is the type of penalty for that kind of credit score) You really can't refinance for about 6 months, and you are working on your credit scores to improve them. Well, in 6 months, rates increase to 6.00% with zero points. You are basically stuck with that higher rate that you originally received.

Keep in mind, it still costs money to refinance, even if you do a FHA streamline refinance. Yes, there are no cost mortgages, but your rate is much higher.

What to do with credit scores if they are below 620 :

This is where a true mortgage professional comes into play. I just had a VA client referred to me by Allison Stewart, who was told on Friday that their scores dropped to 617, as a mid score. I spoke to them on Saturday and explained to them that I can work on their credit and get that up 3 points. Well, on Monday, the previous loan officer called them and told them the same thing. How come she didn't bring this up on Friday? Maybe she is new and not sure? Not good with credit? In any case, here are some basics.

You want to keep your balances below 35% of your credit limit or lower. The higher the percentage, the more it could affect your credit scores. By paying down your balances, this could raise your scores.
Don't pay off your collection accounts if you are applying for a mortgage. You would then want to pay these at closing. By paying off early, it could actually lower your credit scores. It does depend on how old these collections are.
Lates over 12 months old don't hurt as much. Sometimes you can talk to your creditor to remove a questionable late mark.

Summary :

Most of what is mentioned is for FHA mortgages. If you are doing a conventional mortgage, you do need a 620 or higher, and even this costs a lot more than a FHA loan at 620. Here is a comparison with even 20% down. FHA loans vs Conventional loans with 20% down - A rude reality. Besides, you even have MI company issues, that could still deny the loan with a 620 credit score.

Overall, you might want to get into a home as soon as possible. You might have a loan officer that wants to help and can with the lower score, but don't forget, will it cost you more in the long run. You want to deal with a loan officer that will break this down and show you both sides, both comparisons. And be careful of broken promises, because not everyone has integrity and or is truly out for your best interest. This might sound negative, but this is a fact, from examples of past clients that have dealt with broken promises.

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Robert Rauf

CMG Home Loans - Toms River, NJ

Good morning Jeff, So true... Yes some lenders can do less than 620, but the rate can be ugly. Our jobs are as trusted mortgage advisors, not order takers, Yet I still see so many rookie mistakes that kill deals. Yes you can always refi a loan, but when rates are already at 40 year lows, what are the chances of it being worthwhile once your score climbs... Probably 0!

Sep 16, 2009 01:48 AM

Loreena and Michael Yeo

3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX

Real Estate Agents

You said it well. Even at a wreck up score in the 500s - God knows maybe there is a loan out there (I dont know). But Jeff, I think it's time for loans to be credit driven. Your post inspired another new post of mine - soon to come.

Sep 16, 2009 01:58 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

ALLISON... . my pleasure and thank you for the referral. I guess what irked me is the fact that she ends up calling them on Monday, to talk about working on the score, when she could have done that when she first told them about their scores. Let's just get the deal done and go from there. thanks and thanks again for the referral.

NEAL... . that sounds like the perfect loan... ;o) Seriously though, even those loans have become tough now. At least not what I have experienced, but from what I have heard from other loan offices. Maybe they just aren't explaining the problems in details, such as, it could have been an appraisal issue. Even though the clients information is private, I still go over a lot of it with my realtors, giving them information to as why and what. I see no problem with that. If I had to put my finger on it, some of these loan officers just don't tell you because they want to feel above the realtor, in control, or... that they might just not know the answer. hhhhmmm.. thanks for stopping by.

GABE... . thanks for the polite compliment and for stopping by.

MELISSA.... . I agree, that a qualified loan officer should answer these types of questions, and not a realtor. They only think they know through their loan officers, but they don't usually know the details. Besides, a qualified loan officer, that can be a tough one also. thanks

LAURA... . you stated, "Do today what you know you can do tomorrow is great advice!" - this is so true, yet so over-looked on many issues. We listen to the media and other so-called experts stating that you could do this and that tomorrow or later on. Damn, I wish I had those crystal balls. And yes, I can do loans in SC. thanks

TERRELL.... . my pleasure... just a FYI... be careful of all things on AR. I have seen some misleading info from some on here also. It's easy to make any blog look and sound credible. Just food for thought..

ROBERT.... . and good morning to you too... still reminisce about those Columbia National days. Spoke to Angradi about a month ago. In any case, you are preaching to the choir. Order takers in my opinion is what hurt some of what has happened in recent years. And yes, they are still out there. Take the loan now, worry about the issues later. .. or worry about explaining to the borrowers the process later. And in regards to refinancing and where rates will be? This is never brought up, when those loan officers say..."just refinance later"... lol thanks for your input.

LOREENA.... . yes, I am sure there are some loans out there... but some get excited and let down at closing, because they were told that they could still do a loan at a 560 credit score. But wait, it's costing me how much to do this? Work on the credit, then buy. Thanks and I look forward to your new post. Please keep me posted.

Sep 16, 2009 02:20 AM

Mark Warner

RealEspace - Plano, TX

Jeff,

As always great post. Thanks,

Sep 16, 2009 02:35 AM

Gene Riemenschneider

Home Point Real Estate - Brentwood, CA

Turning Houses into Homes

Good advice in this tight lending market. Especially getting in a home now if you can.

Sep 16, 2009 05:12 AM

Stephen Kappre

KW Hometown - Mantua, NJ

Helping You Home

Jeff I'd love to see that 535 get done! I'm not sure I'd try even if someone said it could, haha. Might take the time of 15 loans!! I know you know what I mean. Anywho, the old "refinance later" line always ticked me off so bad. What people were really saying was, "You don't really qualify, but moreso, I need a paycheck, do the loan!!"

Sep 16, 2009 05:44 AM

Tamara Perlman

Referral Network Inc. - Truckee, CA

Jeff--Thanks for the breakdown on what can be done out there and what really isn't practical.

Sep 16, 2009 06:21 AM

Sonja Patterson

Keller Williams - BV - College Station, TX

Texas Monthly 5-Star Realtor Recipient for the Hou

Keep this in mind, even though it could be done, at what cost to you? Does your loan officer explain this to you and break this down? The rates and or add ons for lower credit scores are much higher also. And if loan officers and or realtors say, don't worry, you can refinance later, then WORRY !!! Jeff, your above statement speaks volumes. First time homebuyers are often like sheep waiting to be fleeced if not working with a reputable lender. I advise anyone with a credit score below 620 to wait and get their finances in order. We have enough foreclosures nationwide already. :)

Sep 16, 2009 07:14 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

MARK.... . thanks for the compliment and for stopping by.

GENE.... . actually, the biggest issue in getting into a home now are the appraisals. If they have a 620 or higher, if I qualify them and say they can get a mortgage, I am not having any problems. I think it does come down to asking the right questions up front. thanks

STEVE.... . I still remember doing 500 credit scores 1 year ago. As long as it made sense, and the credit still met FHA guidelines... we were still closing these in-house. But as you and I know, usually, if you have scores under 600, you usually have some sort of credit issues. And yes, those really tough ones, are like doing more than 5 to 15... good point.

In regards to those loan officers that said... don't worry, just refinance later... and then usually gave false hope and misinformation, yes, that ticks me off big time. thanks

TAMARA.... . my pleasure and thanks for stopping by.

SONJA.... . thanks, I am glad people are getting this, that things can be done, but that it costs a lot more... and in most cases, will cost more over the life of the loan. And that old saying of, "don't worry"... aaarrrggghhh... such a HUGE Red Flag.... thanks...

Sep 16, 2009 11:22 AM

Mark Velasco

West Shores Realty - Whittier, CA

Top Producing Broker Associate

Great blog Jeff. It is a good explanation to buyers who think that they can just refi and have a better rate next year.

Sep 16, 2009 05:19 PM

Barbara Altieri

Better Homes and Gardens RE Shore and Country Properties - Shelton, CT

REALTOR-Fairfield County CT Homes/Condos For Sale

Jeff -- how does paying off a collection account lower a credit score? I would think a consumer should pay off anything negative before applying for a loan.

Sep 18, 2009 12:14 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

MARK... . thank you very much. Yes, that is one of my pet peeves when another loan officer is using that phrase to get them to use them.... hey, don't worry, just refinance later and not explain the details of what could happen. Just like what happened with the subprime borrowers... many loan officers told borrowers not to worry, jsy refinance in 6 months to a year. But never sharing that hey, things could change in that time... rates, your equity position... etc, etc

BARBARA.... . there are a few factors involved... the main one is if you have collection accounts 12 to 24 months or older, more so, 24 months and older... and you pay off that creditor, when that creditor reports it back to the credit agency, it's updated with a most current date. When this happens, it treats it as new credit, not an old collection account, which then can change your score for the worst in most cases.

In regards to your statement... "I would think a consumer should pay off anything negative before applying for a loan."

Yes, if it's like 2 months or longer prior to settlement... but I would not want to take that risk, hence why I have clients pay these off at closing. I hope this helps some. thanks

Sep 18, 2009 02:49 AM

Tom Burris

NMLS# 335055 - Baton Rouge, LA

Texas/Louisiana Mortgage Pro - 13 YRS Experience

Jeff is right....

The FICO Scoring Model will ding you harder for a recent paid collection than an old unpaid..... In most cases.

I suggest to all of my clients to NOT pay collections until AFTER they close.

Sep 19, 2009 01:41 AM

George Wilson

Lincolnton, NC - Lincolnton, NC

Great article w/ good information. Whenever I get a buyer who says they qualify for a loan w/ low score I ask if the broker gave them a break down sheet with their credit score(use to ask for the truth in lending statement but got too many blank stares so I rephrase the term & they get understand better), I take a copy to a broker I trust & ask for an unofficial opinion to make sure they aren't being scammed. If legit no sweat but if the broker says looks a bit shady, I get back w/ my buyer and arrange a sit down with their permission to discuss the details closer. Doesn't happen often but every now & then - get a HUH??? Better safe than sorry later.

Sep 19, 2009 05:46 PM

Lyn Sims

Schaumburg, IL

Real Estate Broker Retired

Great post as usual. It's never just cut and dry with a mortgage. You need a true professional to help.

Sep 21, 2009 06:04 AM

Brad Calef

Coco Plum Realtors - Key Colony Beach, FL

You are an excellent resource! Good luck in all ~ Brad

Sep 23, 2009 10:06 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

TOM.... . thanks Tom... I suggest the same. What's sad is that I have had some clients come to me after they left a previous loan officer/lender for numerous reasons... and one big thing was that their loan officer told them to pay off the collection accounts before closing... and this was done when they were pre-qualified.. 1 1/2 months before closing... not a good idea or advice... too risky. thanks

GEORGE... . In regards to the TIL, the truth in lending disclosure... I think it's a bad idea to shop on APR... there are several reasons why, in which I have written about. The best method is the good faith estimate. .. that's if it's accurate and the loan officer was truthful about their figures... I have seen many loan officers just reduce the escrows, to make the total fees look cheaper. Just be careful of getting involved, even if you think you have a trusted loan officer. Overall, thanks for the compliment.

LYN.... . it definitely isn't cut and dry in today's market... lol And thanks for the polite compliment.

BRAD.... . thanks for those kind words...

Sep 25, 2009 01:24 AM

Luis Madrid

CRE The Credit Restoration Experts - Plano, TX

Jeff,

Here is some more informations for your readers.

Credit scores are divided up into 5 areas:

1) 35% of your credit score goes to how well you pay your bills.

2) 30% of your credit score goes on how much you owe. Keep your credit card at 30% of the limit or less.

3) 15% of your credit score is based on how long you have had your credit longer is better.

4) 10% of your credit score is based any new credit. Don't get sucked in on all these new come ons.

5) 10% of your credit score is based on the right mixture of credit (at least 2 revolving credit and at least 1 installment)

RCS Credit Solutions not only permanently deletes derogatory items from a person credit report but also helps people establish new lines of credit if needed. These new lines are established not for credit but to build credit. We are attorney owned, registered with the State of Texas Secretary of State, and we are bonded. We have the best money guarantee in the industry, if you are not satisfies with our service you get your money back minus $50 for each derogatory account permanently removed from your credit report.

So don't send these less than perfect credit persons to someone else, sendthem to me and I will restore them to credit worrithyness in three to six months. This means money money in your pocket.

Luis Madrid

National Consultant

RCS Credit Solutions

214-628-8511 Ofiice

214-679-8577 Cellular

Nov 17, 2009 08:26 AM

Gerry Khatchikian

Red Lodge, MT

ASA, TRC, SFR

Jeff,

Great info. I did not know it was not good to pay off collection accounts right before buying a home. I learned something new thanks to you.

Jan 04, 2010 09:56 AM

Anonymous

Cindy

Hi Jeff:

I wish I would have read this prior to trusting a mortgage broker that I have been working with for the past 7 months while waiting for our short sale offer to be accepted. We are finally set to close, and the broker has just informed me that my credit score is only 614 or 618 (depending on the moon) and doesnt' meet the 620 criteria to obtain a USDA Guarantee loan. He had me pay off the few collection items that I had back in October. I think he was unaware that this may heed or reduce my score further. He also had me transfer my vehicle loans off of my credit. I'm wondering if this may have had a detrimental effect on my score as well. Balls in my court now though - we're already living in the house & if we don't a loan, our family has to move again. Any recommendations?

Mar 26, 2010 02:31 PM

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