We recently talked to a “credit score expert” at one of the Credit reporting agencies. This was important to us, because there’s so much information available online now – and some of it is just misleading. Many of the folks we talk to just want to understand Credit Score Basics for first time homebuyers (and everybody else)… many people don’t understand why the scores they pull on Credit Karma are ALWAYS different from a “mortgage credit score.”
We were able to ask Ken Venable with CREDCO about FICO Scores and what the some of the factors are that they use with mortgage credit scoring models.
For instance the “Free Credit Score.com” jingle that folks use to listen to, doesn’t have a formula that is anywhere close to the “Mortgage” formula we must use to score you!
We’ve seen many people who thought their credit score was “up” to 640 – when we pulled it and found that the score was actually 618, the customer thought we were crazy! We weren’t… there’s just a difference between a Mortgage Report Score, A Medical Credit Score, an Insurance Credit Score and a Retail Credit Score.
Each credit bureau uses a “Score Logic” that is slightly different from one agency to another. Meaning that if 4 different people pull your credit, you might get a slightly different score – especially if the person pulling your credit doesn’t note that you are a junior… or if they have the wrong zip code! That’s right, entering the wrong street address can change your score, slightly.
A credit report is just a snapshot in time… think about someone taking a picture of you in one day. Well, they might get a picture of you at Starbucks, at your desk, in a meeting – you move during your day. Creditors can submit information to the Bureaus on any given day at any given time – so the snapshot (or pull of your credit) on a given day by different people might have slightly different scores. It doesn’t happen often – but it can happen.
You need a credit score ABOVE 620 in most cases to purchase a home. There are FEW exceptions, like if you’ve been in college and just don’t have much credit… but for the most part you need to be NEAR 620 to purchase a home in 2014.
FHA loans have the most lenient credit scoring models. Minimum credit scores for FHA Loans vary, and can go from 580 all the way up to 640.
Folks with minimum credit scores between 580 and 619. If you have excellent offsetting, compensating factors, like extra funds left over after closing, and very low debt to income ratios, you can get a FHA loan with minimum credit scores below 620.
The maximum debt to income ratio for FHA Loans with scores between 580 and 619 is 43.0000%. For folks with this credit score profile, the Down Payment can NOT be a gift.
For MOST people, the Minimum credit score requirements for FHA Loans is 620. For these folks, you don’t need as many compensating factors. Maybe you have some unpaid medical collections on your credit report, or you are getting Gift Funds for your down payment – then the next minimum credit score we will try to get you approved at is 620.
The FHA Loan Automated Underwriting system is set to approve loans with a minimum credit score of 640. Those with scores below 640 will sometimes get an automatic approval through the system – but usually those will be Manual Underwrites, meaning you will have more documentation requirements. FHA Loans can also help in situations where one spouse has good credit and the other spouse has all of the income.
First Time Home Buyer Grants and Mortgage Tax Credits for First Time Home Buyers require a minimum credit score of 640.