When it comes to mortgages and credit scores, there are two really important questions to ask:
–What credit score do I need to qualify for a mortgage?
–What credit score do I need to get the lowest interest rate on a mortgage?
These different but related questions are important if you are looking to buy a home. And the second question is particularly important. With a high FICO score, you can literally save tens of thousands of dollars in interest over the life of a home loan. So let’s take a look at both questions. And if you don’t know you score, be sure to get you free credit score.
What credit score do you need to qualify for a mortgage?
The first thing to keep in mind is that qualifying for a mortgage involves a lot more than just a credit score. While your FICO score is a very important ingredient, it is just one factor. Lenders also look at your income and level of debt, among other things.
As a rule of thumb, however, a credit score below 620 will make buying a home very difficult. A FICO score below 620 is considered sub-prime. In the past there were mortgage companies that specialized in sub-prime mortgages. Because of the challenges in the credit market over the last year or so, however, sub-prime loans have become difficult if not impossible to obtain.
A FICO score between 620 and 650 is considered fair to good credit. But keep in mind, this range of credit scores does not guarantee you will qualify for a mortgage, and if you do qualify, it won’t get you the lowest interest rate possible. Still, to buy a home aim for a score of at least 620, recognizing that other factors weigh in the decision and that some banks may require a higher score.
What credit score do you need to get a low rate mortgage?
It use to be that a score of about 720 would yield the lowest mortgage rates available. Today, the best rates kick in with a FICO score of 760. And interest rates go up significantly as your credit score drops. To give you an idea, the following table shows current rates by credit score and calculates a monthly principal and interest payment based on a $300,000 loan:
Eligibility Requirements for a Kentucky FHA Loan after September 15, 2015
When applying for eligibility for A Kentucky FHA Loans, There are some factors taken into account:
Credit score 620 and above with the mortgage investors we work with, even though FHA will insured lower credit scores, most mortgage lenders will create overlays
No bankruptcies (Chapter 7) in last 2 years with clean credit afterwards and 3 years after a foreclosure or short sale
3.5% Down payment. Can be gifted or money saved-up or money taken out of 401k or retirement account. No cash gifts or unsourced deposits are allowed for down payment on a FHA loan.
Debt to income ratios can be up to 55% on an Approved Eligible Files but restricted on manual underwrites to 31% and 43% respectively.
Overtime or bonus income needs to show a 2 year history for it be eligible for income qualifying on a FHA loan. FHA underwriters typically will take a 2 year average.
FHA appraisals with the new changes now call for the FHA appraiser to check and review the home more thoroughly, hence the typical costs of a FHA appraisal has gone from $325 to $425 due to more legwork involved on a FHA appraisal.
Any disputes on credit bureau will need to be taken out of dispute status typically for your credit scores to be validated, so please be aware of this.
Rent references are usually not called for unless your file get downgraded to a manual
FHA mortgage insurance the upfront and annual mi monthly fee is for life of loan.
A lender may approve a borrower if: acceptable payment history and no major derogatory credit on revolving accounts in the last 12 months. “Acceptable payment history” means: the borrower made all housing and installment debt payments on time for the previous 12 months, and there are no more than two 30‐day late mortgage or installment payments in the last 24 months. “Major derogatory credit” means: payments made more than 90 days after the due date, or 3 or more payments made more than 60 days after the due date.
Child support income is Allowed If using a voluntary payment agreement, the lender: obtains 12 months canceled checks, deposit slips, or tax returns. For divorce decree, legal separation agreement, or court order if there is evidence of receipt for the most recent 6 months, may use the current payment to calculate income, & if there are not 6 months of consistent payments, may average the income received over the prior 2 years, or less if the income has not been received that long 4000.1 II.A
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, (www.nmlsconsumeraccess.org). Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation and are originated by lender. Products and interest rates are subject to change without notice. Manufactured and mobile homes are not eligible as collateral.
I specialize in Kentucky FHA, VA, USDA, KHC, Jumbo and Fannie Mae mortgage loans in Ky. I have helped over 589 Kentucky families buy their first home and refinance their current mortgage for a lower rate; For the first time buyer with little money …view more
Understanding Louisville Mortgage mortgage underwriting guidelines will help you understand your loan options when purchasing or refinacing a home. Now that you have found your dream house, you are going to need to apply for a Louisville Mortgage mortgage loan. Your realtor will either recommend a banking institution or you may already have one in mind. You will be dealing with a loan officer who will be compiling all the data on you to see if you qualify for a loan to pay for this house. All lending institutions have different Underwriting Guildelines set in place when reviewing a borrower’s financial history to determine the likelihood of receiving on-time payments. The primary items reviewed are:
Income is one of the most important variables a lender will examine because it is used to repay the loan. Income is reviewed for the type of work, length of employment, educational training required, and opportunity for advancement. An underwriter will look at the source of income and the likelihood of its continuance to arrive at a gross monthly figure.
Salary and Hourly Wages – Calculated on a gross monthly basis, prior to income tax deductions.
Part-time and Second Job Income – Not usually considered unless it is in place for 12 to 24 straight months. Lenders view part-time income as a strong compensating factor.
Commission, Bonus and Overtime Income – Can only be used if received for two previous years. Further, an employer must verify that it is likely to continue. A 24-month average figure is used.
Retirement and Social Security Income– Must continue for at least three years into the future to be considered. If it is tax free, it can be grossed up to an equivalent gross monthly figure. Multiply the net amount by 1.20%.
Alimony and Child Support Income – Must be received for the 12 previous months and continue for the next 36 months. Lenders will require a divorce decree and a court printout to verify on-time payments.
Notes Receivable, Interest, Dividend and Trust Income – Proof of receiving funds for 12 previous months is required. Documentation showing income due for 3 more years is also necessary.Rental Income – Cannot come from a Primary Residence roommate. The only acceptable source is from an investment property. A lender will use 75% of the monthly rent and subtract ownership expenses. The Schedule E of a tax return is used to verify the figures. If a home rented recently, a copy of a current month-to-month lease is acceptable.
Automobile Allowance and Expense Account Reimbursements – Verified with 2 years tax returns and reduced by actual expenses listed on the income tax return Schedule C.
Education Expense Reimbursements – Not considered income. Only viewed as slight compensating factor.
Self Employment Income – Lenders are very careful in reviewing self-employed borrowers. Two years minimum ownership is necessary because two years is considered a representative sample. Lenders use a 2-year average monthly income figure from the Adjusted Gross Income on the tax returns. A lender may also add back additional income for depreciation and one-time capital expenses. Self-employed borrowers often have difficulty qualifying for a mortgage due to large expense write offs. A good solution to this challenge used to be the No Income Verification Loan, but there are very few of these available any more given the tightened lending standards in the current economy. NIV loan programs can be studied in the Mortgage Program section of the library.
An applicant’s liabilities are reviewed for cash flow. Lenders need to make sure there is enough income for the proposed mortgage payment, after other revolving and installment debts are paid.
All loans, leases, and credit cards are factored into the debt calculation. Utilities, insurance, food, clothing, schooling, etc. are not.
If a loan has less than 10 months remaining, a lender will usually disregard it.
The minimum monthly payment listed on a credit card bill is the figure used, not the payment made.
An applicant who co-borrowed for a friend or relative is accountable for the payment. If the applicant can show 12 months of on-time cancelled checks from the co-borrowee, the debt will not count.
Loans can be paid off to qualify for a mortgage, but credit cards sometimes cannot (varies by lender). The reasoning is that if the credit card is paid off, the credit line still exists and the borrower can run up debt after the loan is closed.
A borrower with fewer liabilities is thought to demonstrate superior cash management skills.
Most lenders require a residential merged credit report (RMCR) from the 3 main credit bureaus: Trans Union, Equifax, and Experian. They will order one report which is a blending of all three credit bureaus and is easier to read than the individual reports. This “blended” credit report also searches public records for liens, judgments, bankruptcies and foreclosures. See our credit report index.
Credit report in hand, an underwriter studies the applicant’s credit to determine the likelihood of receiving an on-time mortgage payment. Many studies have shown that past performance is a reflection of future expectations. Hence, most lenders now use a national credit scoring system, typically the FICO score, to evaluate credit risk. If you’re worried about credit scoring see our articles on it.
The mortgage lending process, once very forgiving, has tightened lending standards considerably. A person with excellent credit, good stability, and sufficient documentable income to make the payments comfortably will usually qualify for an “A” paper loan. “A Paper”, or conforming loans, make up the majority of loans in the U.S. and are loans that must conform to the guidelines set by Fannie Mae or Freddie Mac in order to be saleable by the lender. Such loans must meet established and strict requirements regarding maximum loan amount, downpayment amount, borrower income and credit requirements and suitable properties. Loans that do not meet the credit and/or income requirements of conforming “A-paper” loans are known as non-conforming loans and are often referred to as “B”, “C” and “D” paper loans depending on the borrower’s credit history and financial capacity.
Here are some rules of thumb most lenders follow:
12 plus months positive credit will usually equal an A paperloan program, depending on the overall credit. FHA loans usually follow this guideline more often than conventional loans.
Unpaidcollections, judgments and charge offs must be paid prior to closing an A paper loan. The only exception is if the debt was due to the death of a primary wage earner, or the bill was a medical expense.
If a borrower has negotiated an acceptable payment plan, and has made on time payments for 6 to 12 months, a lender may not require a debt to be paid off prior to closing.
Credit items usually are reported for 7 years. Bankruptcies expire after 10 years.
Foreclosure – 5 years from the completion date. From the fifth to seventh year following the foreclosure completion date, the purchase of a principal residence is permitted with a minimum 10% down and 680 FICO score. The purchase of a second or investment property is not permitted for 7 years. Limited cash out refinances are permitted for all occupancy types.
Pre-foreclosure (Short Sale) – 2 years from the completion date (no exceptions or extenuating circumstances).
Deed-in-Lieu of Foreclosure – 4 year period from the date the deed-in-lieu is executed. From the fifth to the seventh year following the execution date the borrower may purchase a property secured by a principal residence, second home or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited cash out and cash out refinance transactions secured by a principal residence, second home or investment property are permitted pursuant to the eligibility requirements in effect at that time.
Chapter 7 Bankruptcy – A borrower is eligible for an A paper loan program 4 years after discharge or dismissal, provided they have reestablished credit and have maintained perfect credit after the bankruptcy.
Chapter 13 Bankruptcy – 2 years from the discharge date or 4 years from the dismissal date.
Multiple Bankruptcies– 5 years from the most recent dismissal or discharge date for borrowers with more than one filing in the past 7 years.
The good credit of a co-borrowerdoes not offset the bad credit of a borrower.
Credit scores usually range from 400 to 800. Changes to lending standards are occurring on a daily basis as a result of tightening lending standards, and can vary from lender-to-lender– so this information should be considered simply a guideline. For conforming loans, most lenders will lend down to a FICO of 620, with additional rate hits for the lower-end credit scores and loan-to-values. When you are borrowing more than 80%, they typically will not lend if you have a FICO below 680. The FHA/VA program just changed their minimum required FICO to 620, unless you are qualifying a borrower with non-traditional credit. The few non-conforming loan programs that are still available typically require 30% down payment with a minimum FICO of 700 for self-employed and 650 for W-2 employees, and the loan-to-value will change with the loan amount.
A credit score below 600 may require an Alternative Credit mortgage program.
Misinformation on a credit report can be repaired! For more information see our credit repairsection.
The FTC states, “Credit repair companies take your money and vanish.” Anything a credit repair company does for a fee, a consumer can do for free. Be wary of these guys!
If a borrower falls behind on a payment, the creditor should be contacted as quickly as possible. Most creditors will work with a borrower who makes an initial good faith effort to communicate with them.
Lenders evaluate savings for three reasons.
The more money a borrower has after closing, the greater the probability of on-time payments.
Most loan programs require a minimum borrower contribution.
Lenders want to know that people have invested their own into the house, making it less likely that they will walk away from their life’s savings. They analyze savings documents to insure the applicant did not borrow the funds or receive a gift.
Lenders look at the following types of accounts and assets for down payment funds:
Checking and Savings – 90 days seasoning in a bank account is required for these funds.Gifts and Grants – After a borrower’s minimum contribution, a gifts or grant is permitted.
Sale of Assets – Personal property can be sold for the required contribution. The property should be appraised and a bill of sale is required. Also, a copy of the received check and a deposit slip are needed.
Secured Loans – A loan secured by property is also an acceptable source of closing funds.
IRA, 401K, Keogh & SEP – Any amount that can be accessed is an acceptable source of funds.
Sweat Equity and Cash On Hand – Generally not acceptable. FHA programsallow it in special circumstances.
Sale Of Previous Home – Must close prior to new home for the funds to be used. A lender will ask for a listing contract, sales contract, or HUD 1 closing statement.
Debt vs Income Ratio
The percentage of one’s debt to income is one of the most important factors when underwriting a loan. Lenders have determined that a house payment should not exceed approximately 30% of Gross Monthly Income. Gross Monthly Income is income before taxes are taken out. Furthermore, a house payment plus minimum monthly revolving and installment debt should be less than 40% of Gross Monthly Income (this figure varies from 35%-41% contingent on the source of financing).
An applicant has $4,500 gross monthly income. The maximum mortgage payment is:
$4500 X .30 = $1350
Their total debts come to:
$75 Master Card
$625 per month.
Remember, their total debts (mortgage plus other debts) must be less than or equal to 40% of their gross monthly income.
$2,800 X .40 = $1800
$1800 is the maximum debt the borrower can have, debts and mortgage payments combined. Can the borrower keep all their debts and have the maximum mortgage payment allowed? NO!
In this case, the borrower, since they have high debts, must adjust the maximum mortgage payment downward, because:
$1975 – which is more than the $1800 (40% of gross debt) we calculated above.
I wish it were that easy. There are 4 basic things that a borrower needs to show a lender in order to get approved for a mortgage in Kentucky. Each category has so many what ifs and sub plots that each box can read as it’s own novel. In other words, each category has so many variables that can affect what it takes to get approved, but without further adieu here are the four categories in no particular order as each without any of these items, you’re pretty much dead in the water:
You need income. You need to be able to afford the home. Without it, forget it! But what is acceptable income? Basically, it all depends on the type of loan that a borrower applies for. Jumbo, V.A., USDA, FHA, Conventional, Super Jumbo? Let’s just say that there are two ratios:
First Ratio – The first ratio, top ratio or housing ratio. Basically that means out of all the gross monthly income you make, that no more that X percent of it can go to your housing payment. The housing payment consists of Principle, Interest, Taxes and Insurance. Whether you escrow or not every one of these items are factored into your ratio. There are a lot of exceptions to how high you can go, but let’s just say that if your ratio is 33% or less, generally, across the board, you’re safe.
Second Ratio– The second ratio, bottom ratio or debt ratio includes the housing payment, but also adds all of the monthly debts that the borrower has. So, it includes housing payment as well as every other debt that a borrower may have. This would include, Auto loans, credit cards, student loans, personal loans, child support, alimony….basically any consistent outgoing debt that you’re paying on. Again, if you’re paying less than 43% of your gross monthly income to all of the debts, plus your proposed housing payment, then……generally, you’re safe. You can go a lot higher in this area, but there are a lot of caveats when increasing your back ratio.
What qualifies as income? Basically, it’s income that has at least a proven, two year history of being received and pretty high assurances that the income is likely to continue for at least three years. What’s not acceptable?????? Cash income, short term income and income that’s not likely to continue.
For the most part this is fairly simple. Do you have enough assets to put the money forth to qualify for the downpayment that the particular program asks for. USDA says that there can be no money down. FHA, for now, has a 3.5% downpayment. Some loans require 20% down. These assets need to be validated through bank accounts and sometimes gifts. Can you borrower the down payment? Sometimes. Generally if you’re borrowing a secured loan against a secured asset you can use that. But rarely can cash be used as an asset. TALK TO YOUR LOAN OFFICER FIRST when discussing what’s acceptable?
Whewwwwwwwwwwwwwwwwwwwwwwwwwwww. This can be the bane to every borrower, every loan officer and every lender……and yes, to every realtor. How many times has a borrower said my credit’s good, only to find out that it’s not nearly as good as a borrower thinks or nearly as good as the borrower needs. Big stuff for sure. 620 is the bottom score (again with few exceptions) that lenders will permit. Below a 620, then you’re in a world of hurt. Even at 620, people consider you a higher risk that other folks and are going to penalize you or your borrower with a more expensive loan. 700 is when you really start to get in the “as a lender we love you” credit score. 720 is even better. Watch your credit!!!!! Check out my post:
In many ways this is the easiest box. Why????? Generally, there’s nothing you can do to affect this. Bottom line here is…..”is the value of the house at least the value of what you’re paying for it?” If not, then not good things start to happen. Generally you’ll find less issues with values on purchase transactions, because, in theory, the realtor has done an accurate job of valuing the house prior to taking the listing. The big issue comes in refinancing. In purchase transactions, the value is determined as the
Lower of the value or the contract price!!!
That means that if you buy a $1,000,000 home for $100,000, the value is established at $100,000. Conversely, if you buy a $200,000 home and the value comes in at $180,000 during the appraisal, then the value is established at $180,000. Big issues….Talk to your loan officer.
For each one of these boxes, there are over 1,000 things that can effect if a borrower has reached the threshold to complete that box. Soooooooooooo…..talk to a great loan officer. There are so many loan officers that don’t know what they’re doing. But, conversely, there’s a lot of great ones as well. Your loan is so important! Get a great lender so that you know, for sure, that the loan you want, can be closed on!