There are some major changes going into effect very soon regarding credit score requirements on FHA and VA loans. It used to be that on these loans you were able to qualify even if your credit score was below 620 – well it is becoming apparent that more and more lenders are moving away from this. In fact over the past few days I’ve received emails informing me that the major banks (Citi, Wells Fargo, Countrywide, Chase) will not make any exceptions to the 620 rule moving forward.
This means, you must have a minimum of a 620 credit score in order to be considered for a FHA or VA loan. Below are highlights of the changes which will be going into effect in the next few weeks:
- The minimum credit score for FHA/VA loans will be 620 for all purchases, re-finances and streamlined refinances.
- Non-Traditional credit may not be used for creating a credit profile. This applies to all transaction types. Non traditional credit is where you use the most recent twelve month history on accounts such as utility bills, cell phone bill, insurance bills to develop a credit profile of a borrower.
- Non-traditional credit is not entirely out the window. It may be used when the borrower has an acceptable credit score but has less than 3 active credit lines during the past 12-24 months. So, if you only have had a good history with only two credit cards in the past while then we can use your non-traditional credit to supplement the report. However, keep in mind your credit report must still contain a credit score of at least 620.
- Streamlined refinance applications must contain a tri-merged credit report with credit scores. A tri-merged report is one where all three bureaus report a credit profile. It is then merged into one report. In the case of two borrowers on an application each borrower must have a credit score meeting this requirement.
- Borrowers will now no longer be allowed to pay additional fees to offset credit scores lower than 620? In other words the line pretty much ends at 620. There are no exceptions available and no loan pricing adjustments that can lower the credit score requirement.
For those not familiar with some of the terms used in this post, below is a set of previous blog posts which can help you understand it better:
Non Traditional Credit: Still operating in the cash economy?
Many loan programs offer what is known as “traditional credit†to replace a credit report. Traditional credit requires rigorous documentation and much effort from the borrowers part. To establish traditional credit the borrower will be required to furnish proof of good standing with four different creditors. Monthly rent paid is automatically counted as one of the four, in essence only three more are required. These three creditors can be utility companies, telephone companies, and any other installment type credit programs.
Top Five Credit Misconceptions
The East Valley Tribune published a very informative article yesterday on the top five credit (and debt) misconceptions. According to the EVT (citing Transunion), the top five credit misconceptions are:
Below is a pie chart that answers a very common question I receive.
