Most mortgages on the market today are credit score driven with the exception of FHA credit guidelines (one of the best loan programs on the market for people with minor issues that lower scores) and a very few non-conforming loans. Credit scores range from 300 to 850. A rule of thumb: The higher your score, less risk, lower interest and less down payment required. Lower scores could require a larger down payment and could have higher interest.
Credit scores are just one factor but here is the basic break down for loan qualification:
A score of 620 and above will normally get you into a conventional conforming loan. The lowest rates available (Fannie Mae and Freddie Mac) however, require a score of 720 and above. These rates are 1% above the 10 year T-Bill.
In the non-conforming market credit scores will determine your interest rate. You may be in this market for many reasons, not just score. It could be because; your loan amount exceeds conventional guidelines (jumbo), the house does not qualify, no down payment, high debt ratios, credit history issues, or you could be self employed and don’t show enough income to qualify.
Credit scores above 640 will get you the best rates in the non-conforming market which is 1 to 2 points higher than the conforming market, depending on the type of loan you are getting.
Scores from 580 to 639 could put you as much as 3 to 4 points higher in rate, and you can still qualify for a zero down program.
If your score is below 620 you will need at least 25% down and the rate will be 4 or more points higher.
Credit Payment History:
Your payment history contributes about 35% towards your overall credit score but history is also a credit guideline factor on it’s own. Underwriters look at the last 7 years and if there are no Glaring issues such as bankruptcies or collections or judgments they are most concerned with the last two years. This is what the underwriters are looking for:
Mortgage and Rent History
This has to be your number one priority. If you have been more than 30 days late on your rent or mortgage in the last 12 months you will not qualify for a Fannie Mae, Freddie Mac, or FHA/VA loan. Again, there are sometimes exceptions. If you have a very high score, lots of assets, and a legitimate excuse. If you can’t get a waiver for a late mortgage paymentthere are still loans available to you in the non-conforming market. The interest rate will depend on how many times you have been late.
Car payment and installment loans
Your credit history should reflect no 60 day late payments and no more than one 30 day late to get a conforming mortgage. The non-conforming mortgages allow these and again the rate depends on how many late payments you have had.
Revolving accounts or credit cards
You must not have any 60 day “lates” and no more than two 30 day “lates” for a conforming loan. Non-conforming loans do allow them and again the rate is dependant on the number.
Collections, Judgments, and Liens
Fannie Mae, Freddie Mac, FHA and VA require that all be paid in full and they prefer that they be at least two years old. FHA will sometimes make an exception on the length of time or if they are on a current payment plan in which case all other things must be good. Typically, the non-conforming market does not care if they are paid off or not as long as they do not impact title. Some non-conforming lenders want them paid off if they are over a certain amount. This market is a maze of guidelines and they differ from one mortgage lender to another. This is another reason why you always want to use a mortgage broker.
Bankruptcy Credit Guidelines
Fannie Mae and Freddie require 4 years from discharge date. FHA only requires 2 years and a good excuse, and reestablished credit. Actually, you can Qualify for an FHA loan if you are still in chapter 13 (for at least a year) have been paying on time through the courts, and you get court approval which does happen often!
Non conforming lender requirements vary quite a bit. As a general rule they do want to see reestablished credit unless you are putting 20% down. There are some lenders that will lend with one day out of discharge. Your credit score is very important on these programs. Again, you need a broker to sort out the details for you. Guess what, that’s free, and no obligation. They will look at your entire portfolio and if they can’t get you in something now, they will counsel you on the steps you need to take to get in a loan later. Be sure you seek out a broker that has ALL the products on the market including FHA.
Foreclosures Credit Guidelines
Generally, a foreclosure of your primary residence must be at least three years old and have been caused by circumstances out of your control: such as, death of the primary wage earner, layoff, or long term serious illness. Non-conforming lenders do vary but will normally require a substantial down payment if it is less than 3 years old.
Repossession Credit Guidelines
The credit guidelines on this are about the same as a foreclosure except that it cannot have a deficiency balance for a conforming loan. The non-conforming market doesn’t care about the balance if it is more than three years old and again, their credit guidelines vary from one lender to another.
Student Loan Credit Guidelines
Defaulted student loans will haunt you for the rest of your life. Unless they are re-affirmed or paid off you will never get a conforming mortgage. However, the non-conforming market generally does not care about them at all except in extreme cases to the tune of $50k or more.
Be careful here. The conforming market could care less about your divorce agreement with respect to your debt. If you signed, you are still accountable. FHA will sometimes make a wavier if you can show the divorce decree that states it is the other parties responsibility and all other things are good. (these debts will also affect your debt to income unless you can prove the other party is paying with 12 months cancelled checks.) The non-conforming lenders will normally except the divorce decree.
Credit Depth Guidelines
Generally this term refers to how many trade lines you have, how long you have had them and their amounts. Most lenders want to see at least a two years history and at least 4 trade lines. Some require one of those trade lines to have had a balance over a certain dollar amount ($5,000). In the non-conforming market these requirements vary between lenders.
You can see how poor credit will cost you a lot of money in higher interest. It is important to take care of your credit and monitor often as it sometimes contains errors.
Debt to Income Ratio
Mortgage debt to income ratios are the calculations underwriters use to determine whether a borrower can qualify for a mortgage. Debt to income ratios are used to determine if you have the capacity to repay your mortgage.
There are two calculations. The first or Front Ratio is your housing expense-to-income ratio. This is to say your proposed mortgage payment (principal, interest, taxes and insurance) divided by your gross monthly income.
The second or Back Ratio is your total monthly obligations-to-income ratio. This is your gross monthly payment including Mortgage PITI divided by your gross monthly income.
The only tricky part in determining your debt to income ratio is understanding what is and is not included in your total obligations and what can and cannot be included in your gross monthly income. Below is a list of things to remember when you are totaling all of your payments and all of your income. Then you can use the calculators provided here more efficiently.
Total Monthly Payments
Include principal, interest, taxes, and insurance (PITI).
Do not count installment loans that have less than 10 months remaining. Except for Freddie Mac loans. They count everything.
Revolving Accounts, Credit Cards
Include the minimum payment on all open accounts.
You will have to include these also unless you can show twelve months of cancelled checks from the person that is paying the loan and the loan must not have any late payments.
Must be included.
Loans from a Previous Marriage
Must be counted if you are getting a conventional conforming loan. However, If your divorce papers clearly divide up the liabilities, FHA and non-conforming loans do not count them.
What Not To Include:
Utilities, telephone services, auto insurance, or childcare.
Gross Monthly Income Guidelines
Overtime Income Guidelines
Overtime cannot be counted unless you have been receiving it fairly consistently for two years and your employer will say that it is more than likely to continue into the future.
Bonus Income Guidelines
Follows the same rule as overtime.
Commission Income Guidelines
Normally commission requires a two-year history in order for it to be used. People changing from a salaried job to a commission job have tough times getting mortgage loans until they can show two years in the field. There are no-income verification loans on the market with slightly higher rates for people paid by commission.
Self-Employed Income Guidelines
You must be self-employed for two years. Your usable income for a loan is the bottom line on your federal tax return AFTER all the deductions. There are things you can add back such as depreciation but to be perfectly honest, most self employed people have difficulty achieving the required monthly gross income because of all the tax write offs. Again, that is why it is so wonderful that there are non-conforming loans that allow higher debt to income ratios and no-income verification programs.
Child support guidelines
You can use child support if you can prove that you will receive it for an additional three years and you can prove that it has been paid on time for the last year. The only acceptable proof of payment is cancelled checks or a print out from the court if it is being paid through the court system.
Required Mortgage Debt To Income Ratios
Conventional Loan Debt To Income
Fannie Mae and Freddie Mac prefer a maximum of 28% for the front ratio and 36% for the back ratio. (28/36)
Non-Conventional Debt To Income
FHA allows 31/43 and VA only uses the back ratio of 41% as a guideline. VA also calculates what they call Adequacy Of Effective Income and Balance Remaining for Family Support. This is a very complicated worksheet so I won’t go into it here.
Mortgage Down Payment Guidelines
The main thing to remember about mortgage down payment guidelines is that your down payment has to be “sourced” and “seasoned”. What that means is the mortgage lender wants to verify that your down payment is coming from your funds and they want to see it in an institution for at least three months.
You will have to show three months bank statements. If you have $20,000 under your mattress, mortgage underwriting down payment guidelines will not allow you to use it for a down payment.
Exceptions to every rule right? Well, … FHA down payment guidelines will allow mattress money if you can prove that you do not use banks for checking and savings and operate on a cash only basis. (No credit either).
There are a few non-conforming loans that do not source or season the funds. There are also programs that allow Gifts for down payments but those funds usually have to be sourced too.
FHA Down Payment Guidelines
FHA requires 3% down payment unless you are using one of the Gift programs. (Still 3% if it is a gift) Closing cost may be paid by the seller and/or part of them may be financed in the loan. The LTV can actually go as high as 97.75%
VA Down Payment Guidelines
VA has a Zero down payment program and closing cost can be paid by the seller.
Conventional Mortgage Down Payment Guidelines
Fannie Mae and Freddie Mac Require 5% down and sometimes they carry first time homebuyerprograms that only require 3% down.
Non-Conforming Down Payment
It is still possible to get 100% financing in this market. Of course the interest rates are higher because the risk is higher and these programs are credit score driven. A score lower than 640 will usually require a down payment and the lower the score the larger the down payment.
Mortgage Compensating Factors
Mortgage compensating factors are what makes mortgage guidelines seem so inconsistent. You have probably read the basic mortgage guidelines and understand that normally they are followed to the letter. However, all customer portfolios are different and nothing is so black and white it is set in concrete. If you have three very strong compensating factors they can compensate for one area where you may fall outside the guidelines.
One very good example of compensating factors are Debt to Income Ratios. Most loans today are sent through automated underwriting programs that grade your application and approve or don’t approve your loan.
I know a couple that had a 60% back ratio and were approved for a $200,000 Fannie Mae Loan. Fannie Mae back ratio max is 36%. Their compensating factors were: Each had 18 years on the job, Each had retirement accounts over $150,000, and both had credit scores over 750. Without those three factors they would have been turned down for the loan.
So, nothing is really in concrete. Mortgage compensating factors can be any of the following: Ratios, credit score, equity/down payment, assets, and time on the job.
You can see why it is very important that you get an experienced loan officer.