Min. Credit Score Set at 620 for FHA, VA Loans

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.

Read More…

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:

Read More…

What Makes Up the FICO Score?

Below is a pie chart that answers a very common question I receive.

What Makes Up the FICO Score?

Read More…

Washington Post Doesn’t Understand Credit Scores

The Washington Post is alleging that Senator Obama received a special “discount” when he purchased his home in 2005. This is what is being reported:

He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a “super super jumbo.” Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates.

The article discloses the income of the Senator and the property type. Obviously this would have been a full documentation loan disclosing assets on a super-super Jumbo loan.

However, the article fails to mention one very important aspect of interest rates. The senators FICO score. This makes a big difference. The article states that the average loan rate for a similar program was 5.94 percent. So, supposedly he received a 30 basis point “discount”. Well considering the average credit score in Illinois is 684, if the Senators FICO score was well above 720+ then a 30 basis point difference is well within the range. So, I don’t understand why the Post is making such a big deal about a $300/month savings for a higher credit score borrower. They obviously don’t read my blog otherwise they would have read about the four corners of a mortgage.

Based on some of what I have read about the Senator, for example he has no revolving credit card debt and he’s lived frugally all his life, I have a hard time believing that he would have a below average credit score. This is pure speculation on my part and I have nothing to back it up. However, I am willing to give him the benefit of the doubt on this.

I will reveal one thing on what I think about Senator Obama. Even though I disagree with most of his political platform, I like him. I still admire him and have a lot of respect for him. He’s a decent man, and an all American success story.  I know he’s also a politician, but from what I have seen so far (especially after all these years of the Clinton and Bush slime machines) I believe when it comes to character he’s heads and shoulders above both of them.

Errors on Credit Report Can Cost You a Boat Load

Believe it or not credit reports do contain errors. I don’t think any error on your credit report should be considered minor. Because errors in your report can significantly alter your credit score and end up costing you thousands of dollars in the form of higher interest rates, inability to refinance a loan etc. Additionally, there is a growing trend where employers, vendors (if you’re self employed), new business partners etc. are checking your credit before they decide to establish a relationship with you. So, it is ever more important that you diligently monitor your credit report and actively correct any errors you find!

If my long winded advice here doesn’t convince you then read the story of Mark S. Blythe. According to the Orlando Sentential, “Mark S. Blythe’s loans fell through and his business went on the skids — all because a computer glitch spewed bad information on his credit file, sending his credit scores into a free fall.”

The complete fallout of this error is mentioned later in the article:

Blythe’s credit file, in particular, was spammed with several loans he had never taken out with the former R-G Crown and a delinquency record that included 19 late payments. Bank officials said they acted immediately to restore accuracy to the customers’ credit files in early December. But Blythe said he continues to suffer financial fallout long after the bank claims the problem was solved.

“I’m fighting to survive,” he said. “First, my credit scores were trashed and my business came to a halt. Now, my line of credit has been cut off and that’s the last thing I have to operate with. All of this has happened because Fifth Third has not really fixed the errors they reported.”

So, be vigilant. Check your credit report once a year and review it for accuracy. Make sure EVERYTHING is correct. Contact the creditor if you find any errors. Ask them to correct it immediately. Keep track of the dates of your conversation in a log book. Follow up in 30 days.

Mistakes happen. But you and only you are responsible for making sure your credit is in right order. Getting upset with the mortgage loan officer when you urgently need to refinance your home would not be the way to go about solving this problem.

Related posts on Arizona Mortgage Guru for this topic:

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