Credit Score Below 700 and Conforming Rate Mortgages

Historically, a 700 credit score has been considered more than sufficient for low mortgage rates. In today's complicated environment, most lenders offering conforming rate mortgages have moved credit score requirements up. This is predominantly found within the lowest interest rate tiers.

Conforming rate mortgages such as Fanniemae and Freddiemac are funded by private money sectors. FHA mortgages are insured by the government, but are also actually money based via Wall Street type, or other institutional money sources at the end. Even major FDIC insured banks may at first use their depository to fund the closing of a loan, however, shortly thereafter, the asset of the loan is sold to a private investor through a securitization. The servicing may stay with the mortgage lender, and you would be blind to that sale. Nevertheless, your loan would actually be owned by a third party money source unknown to you.

Economic recession has caused default rates on all mortgages with all credit scores to increase. Credit scores below 700 have been affected. “Securitizations” (large money pools combining numerous mortgage loans into one organized marketable asset), embody not just voluminous dollar amounts; but also extensive documentation regarding the credit criteria and underwriting information about a group that can include thousands of files. Credit scores are a factor that makes valuation of these Securitizations a much simpler task. The higher number credit scores statistically perform better.

Why Some Lenders can still provide low mortgage interest rates for credit scores below 700.

Although a group of the highest credit scores provide very low default statistics; so do the right lender underwriting techniques, when considering long term mortgage or housing payment history. Conforming rate mortgages, which usually refer to the lowest available interest rates, are the main part of these statistics.

For example: If a homeowner or homebuyer has a few late payments on some consumer debt; however has never been 30 days late on a mortgage or rent payment within the past several years, the statistical expectation of default from such particular “credit score below 700 borrower”, could be even less than that of many 800 credit score borrowers. There are a few of the right lenders which are set up to address this issue in a securitization; while most others are not. Thus having a low credit score, below 700, need not always impact one's cost for financing a home if the right lender can be identified.

The misconceptions about the actual financing of FHA "insured" loans are also about the underwriting of an overall credit file.

Wall Street seems to be controlling much of this. Since the fall of the subprime market, mortgage back securities and their decision makers have adopted much stricter guidelines for financing all borrowers. A credit score of 700 or below, once considered excellent, often faces some challenges in seeing the lowest mortgage rates with in the past were made more easily available for these credit scores.

HUD does not reference any credit score requirement for approving financing for an FHA insured mortgage. Again it is the money sources and/or investors providing funds for the lenders that is placing these 700 credit score requirements on the system.

There are lenders providing FHA insured mortgages with credit scores under 700. Some FHA approved lenders will go below 600. There are a very select few that will approve borrowers with credit scores of 500 and up. In the few cases seen, a score of 500 is required for a refinance and a credit score of at least 531 is required for a purchase.

FHA insured mortgages seem to have become more popular in today's market. There are several reasons for this.

Although these mortgages have not replaced many of the programs lost with the fall of the subprime market, FHA insured mortgages are provided quality financing for many people whom might have otherwise become prey from the less desirable subprime interest rates and pricing.

FHA guidelines and requirements are different from the many of the former subprime programs in that:

1) First and foremost, FHA insured mortgages provide low interest rates for many folks with less than perfect credit. This loans are usually provided with a 30 year fixed rate mortgage.

2) FHA insured mortgages can provide 96.5% financing for folks trying to purchase a home. Negotiate a sellers concession to pay toward closing costs (up to 6% of the purchase price), and borrowers with challenged credit can often find themselves purchasing their dream home for as little as 3.5% down.

3) FHA's primary concern seems to be housing payment history. If your mortgage and/or rent has been paid on time for the past 12 months, you are usually off to a good start in the underwriting process. However, the are other criteria to meet.

4) Credit score is not supposed matter per FHA guidelines so credit score below 700, 600 or even 580, should not matter. However much of the private sector money that actually funds FHA insured mortgages often puts minimum credit scores before other qualifying requirements. As such, finding the right lender will be key if your credit score falls under 580, 600, or even 700.

5) Income must always be provable and real. IRS form 4506 is required to be signed. As well the IRS form 4506 is processed on virtually every FHA insurance loan underwritten. Transcripts from the IRS are pulled on just about every FHA insured file to confirm borrower income and actual income tax filings for the past 2 years.

6) Self employed borrowers are also required to provide a YTD P&L Statement (year to date profit and loss) prepared by a verifiable CPA.

7) Debt to Income ratios are usually strictly set at 43% back end, with FHA compensating factors making allowances up to 46% if reserves can be provided.

8) If previous mortgage payment history is perfect and LTV is low, (less than 65%), sometimes stable income will qualify for 50% DTI on an FHA insurance refinance.

9) Non-occupying co-borrowers, in effect acting as FHA co-signers can often be added to the loan to improve debt ratio on borrowers that are in the 55% DTI range without the co-signer/co-borrower.

10) Stated income, "no-ratio" and/or "no income check" mortgages are strictly forbidden on any FHA insured mortgage.