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CREDIT SCORES AND QUALIFYING

In recent years, credit scores have become more of a factor in mortgage lending. Before, conventional and government loans didn't have a minimum score to get approved. The person trying to obtain the loan had only to obtain a loan approval from an automated underwriting system, or AUS. As long as the AUS issued the approval, the loan was eligible.

AUSs began to take hold in the late 1990s. Underwriting is the process of examining income, credit, assets, and all the other loan-approval factors piecemeal by hand.

Automated underwriting means the loan application is entered electronically into the AUS, which immediately reviews the various loan factors in the application while simultaneously pulling all three credit reports and all three credit scores.

Almost every loan submitted today is approved electronically. After the approval is issued, the underwriter simply verifies the information that is entered on the application. If the borrower says she makes $5,000 per month, the underwriter will want to see a pay stub reflecting that information. If the application says there is $30,000 in the bank, the underwriter will want to see bank statements showing $30,000 in an account.

Fannie Mae, Freddie Mac, FHA, and VA all use automated underwriting. Even portfolio lenders will use one of these systems to obtain an initial decision.

As with credit scores, automated underwriting has several variables that affect the approvability of a loan application. An AUS won't decline a loan because of a low credit score, but it may decline a loan due to damaged credit.

Sometimes, however, an AUS can be “tweaked” to obtain an approval. For instance, let's say a loan was run through the AUS with 5 percent down and is declined. The loan officer can adjust the loan application and run it through again with a “what-if” scenario. In this example, the loan officer could run the application with io percent down instead of 5.

If the loan is still declined, the loan officer could put 20 percent down in the application to see what happens. The application is run through the AUS with 20 percent down and gets an approval. Now we have a loan approval as long as we can come up with 20 percent down. What if we don't have that?

Then you can try and adjust other factors such as lowering an interest rate that would affect debt ratios or simply lowering the loan amount by buying a less expensive property.

But lenders have begun to tighten the reins on their loan approvals and put credit score restrictions on their approvals, regardless of what the AUS returned.

Now, along with AUS approval, a minimum credit score of 620 is required for all conventional loans. In addition to the minimum credit score required, additional penalties may be added when credit scores dip below 700.

A common penalty is 1/2 of a discount point, or 1/8 percent for each 20 points below 700.

On the other hand, loans with scores above 720 can find lenders who offer additional discounts to their rates, with a credit of 1/4 point.

FHA lenders can have different minimum credit score requirements, but a common minimum score is 580 for an FHA loan approval. Other lenders will take an FHA loan with a credit score as low as 540 as long as it is accompanied by an AUS approval.

 
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