Mortgage With Under 600 FICO Credit Scores
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Mortgage With Under 600 FICO Credit Scores Lending Guidelines

ByGustan Cho

This BLOG On Mortgage With Under 600 FICO Credit Scores Lending Guidelines Was UPDATED On April 29th, 2019

Mortgage lenders view mortgage loan applicants with lower credit scores as higher risk borrowers.

  • Higher risk borrowers are viewed as higher risk by lenders as more likely to default on their home loans than borrowers with higher credit scores
  • One of the factors they use in determining risk is borrower’s credit scores
  • The higher borrowers credit scores, the lower the risk the mortgage loan is
  • Also, the lower the mortgage rates are for higher credit score borrowers

Agency Guidelines Versus Overlays

To qualify for a mortgage with under 600 FICO credit scores, the mortgage lender will consider the overall financial profile of borrowers and look for compensating factors.

  • Borrower’s seeking a mortgage with under 600 FICO credit scores will most likely need to seek a mortgage lender who has no mortgage lender overlays
  • Gustan Cho Associates Mortgage Group are direct lenders with no overlays on government and conventional loans
  • Lenders With No Overlays will just go off either Fannie Mae or Freddie Mac Automated Underwriting System automated findings
  • There are many lenders who have their own additional mortgage lending guidelines
  • This is called mortgage lender overlays, on top of the minimum guidelines set by HUD and/or FANNIE MAE, FREDDIE MAC, VA, and USDA Mortgage Guidelines
  • For example, HUD’s minimum lending guideline for a home buyer to qualify for a 3.5% home purchase loan requires a credit score of 580

Mortgage Lender Overlays With Credit Scores

However, many banks, credit unions, mortgage bankers, and mortgage lenders have lender overlays

  • They require borrower’s minimum credit score to be 620 to 640
  • Borrowers who get turned down by a lender who tells them they do not qualify for an FHA loan because credit scores are under 620,  it does not mean they do not qualify for an FHA home purchase loan
  • It just means they do not qualify for that particular mortgage lender
  • A large percentage of my business is borrowers with credit scores under 600 credit scores
  • A home loan applicant seeking a mortgage with under 600 FICO credit scores does not automatically mean they are a high credit risk and/or are financially irresponsible
  • A lower credit score can mean that the mortgage loan applicant with the following:
    • any active credit tradelines
    • high credit card balances
    • Or derogatory items reporting on their credit report that are erroneous
  • There are many lenders that cater to borrowers with mortgage with under 600 FICO credit scores

FHA Mortgage With Under 600 FICO Credit Scores

 The Federal Housing Administration guarantees private mortgage lenders against default on mortgage loans as long as they are an approved FHA mortgage lender and follow FHA mortgage lending guidelines.  To qualify for a FHA insured mortgage loan, a home buyer only needs a 500 FICO credit score.  For home buyers with credit scores between 500 FICO and 579 FICO, a 10% down payment is required.  To qualify for a 3.5% down payment on a home purchase and get a 96.% loan to value FHA insured mortgage loan, a 580 FICO credit score is required.  If your credit score falls below 580 FICO, your mortgage loan originator may have some quick credit fixes to boost your credit score over the 580 FICO threshold.
 Collection Accounts, Charge Offs, Late PaymentIf you are seeking a mortgage with under 600 FICO credit scores, the chances are that you probably had prior bad credit, collection accounts, charge offs, and late payments.  There are minimum lending guidelines with regards to collection accounts, charge offs, and late payments as well as prior bankruptcy, foreclosure, deed in lieu of foreclosure, and short sales.  There are also lending guidelines concerning judgments, tax liens, child support payments, and government loans.

FHA does not require borrowers to pay off old collection accounts with balances.

  • For non-medical collection accounts that have balances of over $2,000, 5% of the unpaid collection account balance will be taken towards calculating the mortgage loan applicant’s debt to income ratios
  • This can cause a big issue for unsatisfied collection accounts with high balances
  • One good news is that the 5% rule is exempt if borrowers have a written payment agreement with creditors:
    • if there is a payment agreement signed by both the debtor and collection account agency
    • Need to have minimum monthly payment agreement
    • That payment will be used towards calculating the debt to income ratios
    • There is no payment seasoning requirement

Mortgage With Outstanding Collection Accounts

Medical collection accounts are exempt.

  • Charge offs do not matter and are okay
  • Late payments are allowed as long as the last late payment is over 12 months old
  • Recent late payments that have not been seasoned 12 months can be a problem
  • One late payment in the last 12 months may be allowed
  • However, multiple recent late payments may pose a problem
  • Borrowers may need to wait 6 to 12 months of on-time payment history

Borrowers with unsatisfied judgments on their credit report, the mortgage loan application process will be halted until a written payment agreement have been set up with the judgment creditor. Three months of payments need to be made to a judgment creditor. An outstanding judgment can be negotiated and paid off for less than the original judgment amount.

Waiting Period After Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure, Short Sale

For FHA loans, there is a two year waiting period after Chapter 7 bankruptcy to qualify for an FHA insured mortgage loan. VA requires a two year waiting period after Chapter 7 Bankruptcy discharged date as well

  • There is a three year waiting period after the recorded date of a foreclosure or deed in lieu of foreclosure to qualify for FHA loans and USDA Loans
  • The waiting period is reduced to 2 years on VA Loans
  • There is a three year waiting period after a short sale for FHA and USDA Loans
  • The three-year time clock starts from the short sale date which is reflected on the HUD’s settlement statement to qualify for USDA and FHA Loans
  • VA Loans shortens the waiting period to two years after a short sale to qualify for VA Loans
  • Borrowers in a Chapter 13 Bankruptcy repayment plan can qualify for VA and FHA Loans one year into their Chapter 13 Bankruptcy Repayment Plan with Trustee Approval
  • There is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for FHA and VA Loans

Conforming Mortgage Guidelines After Bankruptcy And Housing Event

For conventional loans, there is a four year mandatory waiting period after Chapter 7 bankruptcy.

  • There is a 7 year waiting period after foreclosure to qualify for a conventional loan
  • There is a four-year waiting period to qualify for a conventional loan after a deed in lieu of foreclosure or short sale
  • Those with mortgage part of Chapter 7 bankruptcy, there is a mandatory waiting period of four years from the discharged date of Chapter 7 Bankruptcy to qualify for a conventional loan
  • The housing event of foreclosure, short sale, deed in lieu can be recorded after the Chapter 7 Bankruptcy date
  • There is a two-year waiting period to qualify for conventional loans after Chapter 13 Bankruptcy discharged date
  • There is a four year waiting period after Chapter 13 Bankruptcy dismissal date to qualify for conforming loans

Credit Disputes During Mortgage Approval Process

Borrowers cannot have a credit dispute for a derogatory credit item that has a balance of over $1,000 that is a non-medical derogatory account during the mortgage application process.  Any non-medical credit dispute that has a balance of $1,000 or greater will automatically halt the mortgage application process. The borrower’s mortgage process will be halted until that credit dispute is retracted or the balance is paid off.  Medical collection accounts, zero balance derogatory accounts or aggregate outstanding non-medical collections under $1,000 in total is exempt from credit dispute retraction.

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