Jeff Belonger was kind enough to allow this wonderful article to be re-blogged (re-published) and since it is such a terrific article about FHA and credit scores I knew it would help many of you who have the same questions.
Thank you Jeff. Once again, you have come to the forefront with a wealth of knowledge about FHA mortgage products.
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.
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 !!!
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.
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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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!
Copyright © 2009 by Jeff Belonger of Infinity Home Mortgage Company, Inc