Credit Scores In Mortgage Application Process
This guide covers credit scores in mortgage application process versus credit payment history. Meeting credit score requirements is important, but the borrower’s credit history is equally important. A borrower with a credit score of 700 will not qualify for a mortgage if they had multiple recent late payments in the past 12 months.
Borrowers who meet the minimum credit score requirement may qualify credit score-wise, but the Automated Underwriting System (AUS) may not like the borrower’s credit history.
Examples where credit history comes into play and borrowers cannot get automated underwriting system approval are the following: Late payments in the past 12 months, Late Payments after bankruptcy, or housing events. In the following paragraphs, we will discuss credit scores in mortgage application process.
Which Credit Scores in Mortgage Application Process Do Lenders Use To Qualify?
Which credit scores in mortgage application process do mortgage underwriters use? Mortgage lenders will pull all three credit reports for every borrower:
Minimum Credit Scores in Mortgage Application Process Guidelines
There are minimum credit score requirements to qualify for home loans. Each mortgage loan program has its minimum credit score requirements. To qualify for FHA loans with a 3.5% down payment, borrowers need 580 credit scores. Fannie Mae and Freddie Mac require 620 credit scores. Each credit bureau will have a different credit score for consumers. The mortgage lender will use the middle credit score as the qualifying score. For example, say a mortgage loan applicant has the following three mortgage scores:
- 740 Transunion
- 640 Experian
- 540 Equifax
The 640 Experian credit score will be used: 640 is the middle of the three credit scores. Borrowers with co-borrowers, then the co-borrowers credit scores will be evaluated. The middle credit scores will be targeted. Whoever has the lower middle credit score will be the qualifying score.
Case Scenario on Credit Scores in Mortgage Application Process
Let’s take an example: Let’s say Michael Smith and Mary Smith are husband and wife and need to qualify for a mortgage. Michael Smith has a middle credit score of 640, and Mary Smith has a middle credit score of 587. Since Mary Smith has the lower of the two middle credit scores, Mary Smith’s middle credit score will be used as the qualifying score.
Importance of Credit Scores In Mortgage Application Process
Credit scores in the mortgage application process are probably the second most important factor considered next to income by lenders: Low credit scores in the mortgage application process mean borrowers will not just pay higher rates, but it is a factor that determines whether or not they qualify.
To qualify for a 3.5% down payment FHA loan, borrowers need a minimum credit score 580. The minimum credit score to qualify for a conventional loan is 620. To qualify for a condotel unit loan, the minimum credit score is 680.
Most jumbo lenders expect borrowers to have credit scores north of 700. FHA rates with higher scores are much lower than those with lower scores borrowers. Credit scores of 580 will be higher than those of 640 credit scores. Low credit scores mean higher costs. Many times, I need to help home buyers with their credit issues before being able to proceed with processing and underwriting their files.
If My Credit Scores In Mortgage Application Process Improves, Can I Use New Credit Scores?
Many lenders do not allow borrowers to use newly updated improved credit scores during the mortgage process. Borrowers will often get pre-approved with lenders, but their credit scores improve. Gustan Cho Associates allows loan officers to use higher updated new credit scores for pricing and locking rates during the mortgage process. Unfortunately, some lenders do not allow this, and whatever scores they were qualified with are the scores loan officers need to lock the rate.
Borrowers cannot use an updated credit report with better scores during the mortgage application process at some lenders. Whatever credit report and credit scores were initially pulled when they signed the mortgage loan application will be used until they close.
Suppose credit scores have dramatically improved, which can significantly affect getting a great mortgage rate. In that case, the loan officer can cancel the loan application with the current wholesale mortgage lender and take the file to a different wholesale lender. The great news at the Gustan Cho Associates is that we can use higher credit scores of borrowers if their credit scores have improved without canceling the mortgage file. Borrowers who need to qualify for a mortgage with a direct lender with no mortgage overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
