It is no doubt that you realize that your credit score has a lot to do with whether or not you are able to qualify for a mortgage, including FHA loans. But, did you know that there is more than meets the eye when it comes to your credit report? The lender you apply with is not only looking at the three scores at the bottom of your tri-merged credit report or even your credit history – they are also looking at your credit inquiries because they can give quite a bit of insight into what you plan on doing with your financial future.

Past Credit Inquiries

The inquiries on your credit report show a potential lender what you have tried to apply for recently. This could be a credit card, installment loan, or even a line of credit. These inquiries are not a guarantee that you took out new debt, but they do alarm the new lender that there could be new debt that is not reporting on your credit report. If the inquiries are rather recent, such as within the last month or two, expect your new mortgage lender to question the inquiries and require proof that you did not take out any new debt. If you did take out a new loan, such as an installment loan, the new payment will need to be figured into your debt ratio to ensure that you still qualify for the FHA loan. If your debt ratio is borderline close to the limit of 43 percent on the back-end, then you might have a little difficulty qualifying for the loan.

What were the Inquiries For?

Another aspect that the new lender needs to evaluate is what the new inquiries were going to be used for – especially if the funds were used to help the borrower qualify for FHA loans. If you have a large amount of reserves to help you qualify for the loan and you have new inquiries for a line of credit, the lender can put two and two together and disqualify you for the loan. It is the lender’s job to ensure that you did not use any of the borrowed funds to help you make your down payment or pay the closing costs on your new loan.

Consider what you Apply for Early in the FHA Application Process

The best way to avoid any confusion when you decide to apply for FHA loans is to avoid applying for any other debt during the few months prior to the application as well as during the time period that your loan is being processed. Most lenders pull your credit at least twice, once at the time of application and then again right before closing. This helps them to see if there were any new inquiries on your credit report as those report right away. Even if a new debt is not reporting on your credit report right away, the inquiry is enough to get a lender to be suspicious about what you have going on in your financial future.

Don’t look at the fact that lenders need to look at your credit inquiries as a bad thing; they are just trying to protect themselves as well as you from financial ruin in the future. It is the lender’s job to ensure that you can afford the loan not only based on your past income and debt, but on what they can predict for the future. The inquiries on your credit report provide quite a bit of insight into your financial future, so it makes sense that lenders will use it. They can show you how the new debt can make your debt ratio skyrocket, which could make it difficult for you to pay your debts in the future. Holding off on any new credit cards, auto leases, and installment loans is a good idea until you are done with the process of getting a new mortgage loan.

Your credit score is one of the first things lenders look at whether you are applying for a conventional, FHA, VA, or USDA loan. For that reason, you should understand what your credit score is made of and why you need to worry about it when you apply for a conventional loan. Generally, credit scores are comprised of 5 different parts, but the largest two that you need to worry yourself with include:

• Payment History
• Amount Owed

Payment History

The payment history on your credit report is the most important component of your credit report. In fact, it makes up 35 percent of your credit score. This is the part of the score that is tied into how many late payments you have. The most recent late payments affect your score the most, but every late payment negatively affects the bottom line. In general, late payments remain on your credit report for up to seven years as seven years is the statute of limitations, which means they can no longer report after that length of time. Your most current payment history with each lender will be reported as follows:

• Paid as agreed
• Up to 30 days past due
• Between 31 and 60 days past due
• Between 61 and 90 days past due
• Sent to collections
• Not being used
• Account in payment agreement or bankruptcy
• Repossession
• Charged off account

The most recent status will report on the credit report. For example, if you are 33 days late on an installment loan, the current status will report that it is between 31 and 60 days past due. If you catch up on the payments and end up current on that payment, it will then report paid as agreed on the next month, but the 60 day late will continue to report for the next seven years, affecting your credit score accordingly. The more time that passes since the delinquent payment, the less it affects your score, but it does not completely diminish for 7 years.

Amount Owed

The amount you owe on each of your accounts plays an important role in your credit score as well. It is not so much the fact that you owe money, that is a given; it is the amount of money that you owe compared to your available credit that matters. Take into consideration the following scenarios:

• Your credit limit on a revolving credit account is $1,000 and you have $899 outstanding. In the eyes of any new lender, this is a large amount of money and shows that you tend to overextend yourself financially.
• You have a credit limit of $1,000 and you have $200 outstanding. In the eyes of the new lender, you are responsible with your available credit. You do not overspend and you keep your credit at a level that you are comfortable with paying it back.

Between those two scenarios, the person that has only $200 outstanding will have the higher credit score based on credit utilization alone. Since this component of the credit score is 35 percent of the score, it can greatly impact your score, and your ability to get a conventional loan. In general, high balances on revolving accounts have a higher impact on your credit score than high balances on an installment loan since on an installment loan, you are given the total amount; you are not able to use, repay, and reuse the credit given. If, however, overall you have a large number of accounts with a balance, your credit score will be negatively impacted.

While you need to focus on every aspect of your credit score, the payment history and the utilization rate are the two components that you need to worry about the most. By making your payments on time and keeping the amount of credit you have outstanding in check, you maximize your chances of having a higher credit score that enables you to be a good candidate for a conventional loan.

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The FHA loan has always been known to allow low credit scores. In fact, the FHA only requires a score of 500 in order to get approved. Of course, you have to put down 10 percent or more if your score is that low, but you can still get the loan, according to the FHA. That is not what most lenders say, however. They typically create their own rules on top of those of the FHA in order to ensure that their default ratio is low. Why would a bank care so much about their default ratio on a loan that is backed by the FHA, which means the FHA will pay them back for the loan if it is defaulted on? It’s simple – the FHA actually penalizes banks that have a higher than normal default ratio. But things are about to change in that arena fairly soon.

The New FHA Rules

Prior to late last year, FHA lenders were compared to one another based on their default rates. Every lender within a specific region was compared to each other. If one lender had an FHA default rate of 3% and another had a default rate of 10%, the lender with the 10% default rate would more than likely get its rights to provide FHA loans revoked. Unfortunately, the way the lenders were compared was not fair – there was no categorizing of the loans, which meant that if the lender with the 10% default rate simply went with the FHA guidelines, allowing loans for borrowers with credit scores as low as 500 while the first lender did not allow any loans with a credit score lower than 640, it was not a fair comparison. The FHA has since realized this issue and has changed the way it compares lenders.

Today, the FHA compares lenders nationally, not just in a geographic area and each loan is put into a category based on their credit score. This means that the default rate of loans with a credit score in the 500s will no longer be compared to the default rate of loans in the 650s, as an example. The FHA has its own level of categorizing and is much less stringent about revoking the right to provide an FHA loan to borrowers.

How the Borrower Benefits

So how do you benefit from the new rules regarding the comparative ratio? It’s simple – more lenders are going to be willing to provide FHA loans to borrowers with lower credit scores. Now, they might not go as low as 500, but they might be a little more flexible than the standard 640 or higher that most lenders stuck to in the past. Because the penalties are not as harsh, lenders are able to bend their own rules slightly.

This means that if you have a credit score on the lower end, you might have a better chance at getting an FHA loan today. Of course, not every lender is going to be willing to take on a low credit score despite the lower risk of being revoked from providing FHA loans because they are just not comfortable with it. There are lenders that will though; the FHA predicts that more than 100,000 borrowers will now be eligible for FHA financing as a result of the changes.

If you are in the market for an FHA loan and you have lower credit scores, do not give up. Shop around with various lenders to see who will be willing to take the chance. Of course, the more compensating factors that you have to show the lender, such as a low debt ratio and stable employment, the higher your chances are of getting approved.

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Minimum credit scores are something most borrowers worry about when trying to determine what type of financing they can obtain. The problem with the VA loan, however, is that there is no minimum credit score per se. The VA itself does not have a specific score that they look for when qualifying a borrower. The problem is that it is not the VA that does the qualifying, nor do they provide the funds. The money is provided by a bank. It is this bank that sets the precedent regarding the minimum credit scores they will allow for a VA Loan.

Credit Requirements for VA Loan Eligibility for Veterans

There is not one blanket policy that states what credit score lenders will accept when it comes to a VA loan. The beauty in this is that you can shop around if one lender turns down your application. You are not restricted to using a certain lender; you just have to use a lender that is VA approved. It is also recommended that you use a lender that is well versed in VA loans to ensure that the process goes smoothly. In general, however, most lenders will not take a credit score that is below 620. This is the typical point where a loan becomes too risk and not very many lenders will take that risk.

Compensating Factors for Deficient Credit

There are the lenders that are few and far between that will take the risk and go down to a credit score of 580. This does not mean that someone with terrible credit, say 590 that has no assets, a high debt ratio, and inconsistent income will get approved, however. Lenders that allow lower than average credit scores typically require compensating factors. This could be any of the following:

• Low debt to income ratio
• Long standing, consistent income (been at the same job for many years)
• Excessive assets allowing you to put down a large down payment
• Excessive assets enabling you to have a high disposable income every month after the mortgage payment

Some lenders will accept one of the factors above as a compensating factor, while others will require you to meet several of the above factors in order for them to take on the risk of your low credit score.

Credit History

Along with a credit score, the VA and the lender are concerned with your credit history. Again, the VA is much more lenient when it comes to the requirements for the VA loan, allowing borrowers to use alternative credit histories rather than standard trade lines if necessary. Most lenders are not that lenient, however, and require at least 2 standard trade lines in order to consider a borrower for a VA loan. The standard trade lines include any of the following:

• Credit cards
• Personal loans
• Auto loans
• Mortgage
• Student Loans

The length of time you held any of these trade lines will also play a role – most lenders require them to be reporting for at least 2 years in order to be used for qualifying purposes.

If a lender does accept alternative lines of credit, they are usually looking for 12 months of timely payments from any of the following companies:

• Utilities
• Phone companies
• Insurance payments (medical, auto, house)
• Rent payments

Every lender has their own requirements regarding what they will allow for alternative credit, so it is worth asking the lender to see what they require.

Negative Credit History

The VA does allow some concessions for delinquent credit histories, but like most other loans, you must have fairly timely payments in your recent credit history in order to be approved for the loan. Generally, no more than one 30-day late payment is allowed in the last 12 months out of any of your outstanding credit. This allowed 30-day late cannot be on any type of housing payment during the last 12 months or it will not be able to be insured by the VA. In addition, as with all other requirements, a specific lender may have their own requirements. Some lenders are not willing to accept any late payments in the last 12 months, especially if they are accepting a lower than average credit score.

Special Circumstances

As with any loan, the VA loan has certain time periods that must elapse before the VA can insure a loan. These circumstances include:

• Bankruptcy – A Chapter 7 BK must be discharged for at least 2 years before applying for the VA loan. A Chapter 13 BK must have on-time payments for the last 12 months and approval from the trustee overseeing your case before you can apply for the loan.
• Foreclosure – Applicants must wait 36 months after a foreclosure to obtain another VA loan.
• Collections – In most cases, all collections must be paid before a VA loan can fund. If there are special circumstances, such as is the case with certain medical collections, an exception can be made.
• Judgements – No outstanding judgements are allowed when funding a VA loan.
  Liens – All liens must be paid and cleared before a VA loan can fund.

As you can see, there are many factors that go into approving a VA loan. It is not a matter of just looking at your credit score and approving you for the loan. The lender will go over your credit history and determine your level of risk in terms of having a new mortgage. If you have any special circumstances, such as a bankruptcy or foreclosure, you cannot get a loan even if your credit score has improved high enough to qualify until enough time has passed. As stated before, however, every lender has their own requirements, so if you are turned down by one lender, you can always shop with another, just make sure to do it within a 2-week period so that your credit score is not hit for multiple inquiries bringing your score down even further.

Conventional loans are historically harder to qualify for than any other type of loan, but they have gotten a little easier to obtain this year. Of course, everyone is worried about the minimum credit score that is required as it seems your credit dictates everything you do, but there are many other factors that play into getting approved for a conventional loan. As with all other loan programs, there are minimum credit scores that are set forth by Fannie Mae and Freddie Mac, the two entities that offer conventional financing, but lenders can have their own say in what scores they will allow combined with other factors that affect the loan approval process. To make matters more complicated, there is an automated underwriting program to contend with, making it really hard to predict what will and will not get approved. As a general rule, however, no matter the circumstances, a fixed rate loan from Fannie Mae or Freddie Mac cannot have a credit score below 620 whether the loan is going through the desktop underwriter program or being manually underwritten.

Desktop Underwriter and Manual Underwriting Credit Score Guidelines

The major difference with conventional loans compared to any other loan program is the use of the automated desktop underwriter. This automated system runs a loan application through with all of the necessary information and determines the eligibility of the applicant. If you are approved, your credit score is not a major issue and there is no minimum credit score to speak of, unless of course you are below the 620 threshold, at which point you would receive an “Out of Scope” approval which means that the loan is not eligible for Fannie Mae or Freddie Mac loans. These loans can be referred to a subprime loan program where the credit scores can be lower, yet the rates are a little higher. Some borrowers with lower credit scores also have luck with FHA loans because they allow the credit scores to be a little lower while still providing adequate financing. If the credit score is above 620, though, the DU program uses the “whole borrower” aspect to come up with its findings. This means the program takes into consideration your income, assets, reserves, debt-to-income ratio, and past use of your credit including your credit utilization rate to determine if you are worthy of a mortgage. If the loan file is straightforward, the process will go through. If your loan profile is a little “messy” it might meet the parameters but require manual underwriting for extra scrutiny of your documents.

There are several responses that the Desktop Underwriter program will provide the lender with regarding the eligibility of the loan for Fannie Mae or Freddie Mac purchase as well as the scrutiny in which it needs to undergo regarding underwriting guidelines. Generally you will see one of two responses for Fannie Mae loans:

• Approve/Eligible
• Refer/Eligible

Both responses mean that the loan meets the parameters of Fannie Mae but the Approve and Refer is where the differences lie. An approve status means that the loan is pre-approved and will just need to meet a few conditions in order to be fully underwritten. This usually means obtaining a full or drive-by appraisal, providing proof of income according to the DU guidelines, and providing proof of any assets. The conditions will be clearly spelled out for the underwriter giving the lender a clear direction on what needs to be done to get the loan funded with a clear to close status.

A refer status, on the other hand, means that the loan needs to be manually underwritten. This is when the minimum credit scores come into play. Fannie Mae has strict guidelines enforcing minimum credit scores for various scenarios.

Freddie Mac uses the Loan Prospector program which works similarly to Desktop Underwriter, but its findings are a little different. You will see:

• Accept/Eligible
• Caution/Eligible

These findings are similar to those of the DU program. The accept allows the borrower to provide less documentation for final approval of the loan while the caution approval requires a more in depth look at your documents.

The credit qualification guidelines for fixed rate loans are as follows:

These scenarios are for loans that have no reserves to use for qualification purposes:

• Standard 1-unit purchase with a DTI lower than 36%: Minimum credit score for an LTV between 75% and 95% is 680; if the LTV is lower than 75%, then the credit score can go down to 620.
• Standard 1-unit purchase with a DTI between 37%-45%: Minimum credit score for an LTV between 75%-95% is 700; if the LTV is lower than 75% then the credit score can go down to 640.

If you have at least 6 months of reserves for qualification purposes and an LTV higher than 75%

• Standard 1-unit purchase with a DTI lower than 36%: Minimum credit score is 660

If you have at least 2 months of reserves for qualification purposes and a debt ratio between 36% – 45%:

• Standard 1-unit purchase with an LTV greater than 75%, the minimum credit score is 680
• Standard 1-unit purchase with an LTV less than or equal to 75%, the minimum credit score is 620

The guidelines for Adjustable Rate Mortgages differ a little bit and are as follows:

These scenarios are for borrowers with no reserves:

• Standard 1-unit purchase with a DTI lower than 36%: Minimum credit score for an LTV between 75% and 90% is 680; if the LTV is lower than 75%, then the credit score can go down to 640.
• Standard 1-unit purchases with a DTI between 37%-45%: Minimum credit score for an LTV between 75%-90% is 680.

These scenarios are for borrowers with 2 months’ worth of reserves:

• Standard 1-unit purchase with a DTI between 37%-45%, the minimum credit score is 680.

Generally, if your credit score is high enough, you do not have any outstanding judgements or liens and enough time has lapsed since any derogatory credit issues, such as a bankruptcy or foreclosure, the loan will go through Desktop Underwriter or Loan Prospector. It is then up to the lender if he wants to take the risk on y our loan.

USDA loans are an often overlooked loan that could benefit many borrowers. Thinking that this loan is strictly for rural (meaning way out in the countryside homes) is not the only use for them. The USDA has set boundaries for USDA loans that far surpass the expectations of many people. A home that you are considering may fall within those boundaries and you may never know unless you ask. These loans offer many benefits to borrowers including 100% financing; the ability to roll the mortgage insurance fees into the loan; and easy qualification guidelines. The largest stipulation of these loans is the need to have income that is low enough to qualify as this program was started to provide those people that would not qualify for any other loan type to become homeowners.

USDA Rural Development Loan Credit Score Requirements

Aside from the income requirements, many people wonder what the minimum credit scores are for the USDA loans. Since this is a government program, there is a minimum score of 580 required. Many lenders will not accept scores that low, however. The 580 threshold is set by the USDA and is the lowest score they will allow in order to back the loan. In addition, the USDA has set forth certain categories regarding your credit scores. The type of financing and concessions you receive is dependent on your credit score.

• If your score is between 581 and 619, you are a risky borrower. These are the borrowers that will not be able to obtain a USDA loan from many approved lenders as they will be unwilling to take the risk. The lender that does take the risk will be required to carefully evaluate your loan application and supporting documents. Everything that makes up your loan profile will need to be very specific and accurate. The lender will look for any issues that could pose a problem and they will not allow for any debt ratio waivers, which makes an exception for a higher than normal debt ratio. In addition, housing history must be present for borrowers in this category. This means that you must be able to provide evidence of timely housing payments, whether as a mortgage or rent payment. If you are a first-time homebuyer and were living with family/friends and not paying rent, you will not be eligible for a USDA loan at this time.
• If your credit score is over 620, you are in a better category. The USDA considers any score over 620 good and allows for streamlined processing of the loan. This means your loan documents will undergo less scrutiny as will your credit report. The lender will go over your credit report and question any issues that he sees, but they will not likely render it impossible to get a USDA loan. Some lenders will require proof that the delinquencies or collections were taken care of, but most will not since the credit score has bounced back, which tells the lender that you have become more financially responsible since that issue occurred. As an added benefit for having a credit score over 620, there is no need for a housing history. This is great news for borrowers that were not renting or paying a mortgage but were rather living with friends/family rent free. They can still become first-time homebuyers based on their other credit.
  Credit History

Something that USDA loans focus on more than your credit score is the history itself as it speaks volumes in terms of your financial responsibility. The USDA looks for things like how many late payments you have had in the last year. If there is more than one 30-day late during that time, you will not be eligible for the loan. They also look at derogatory credit situations, such as bankruptcies, foreclosures, and short sales. Each of these situations must be at least 3 years behind you in order to qualify. In addition to late payments, your housing history is looked upon separately. The USDA will go back over the last 3 years’ worth of payments to see how timely you made those payments. If there are more than two instances of late payments, you are ineligible. Last, but not least, all collections must be paid off and discharged in order to get the USDA loan and no judgements of any type are allowed.

Exceptions to the Standard USDA Credit Eligibility Guidelines

As with any loan, there are exceptions to the rule. Since the USDA operates to provide those with lower incomes with the ability to purchase a home, they offer exceptions for people that have had unfortunate circumstances. These circumstances must be something that you were not able to control by any means and were a one-time occurrence. Examples of what the USDA would provide exceptions for include serious illnesses, the loss of a job due to a company closing or downsizing, or a sudden injury that rendered you incapable of working. The USDA and your lender will carefully go over the data that supports your claims and determine if your late payments and/or collections were in fact a result of that unfortunate time in your life. Of course, if you have been able to pick up the pieces and improve your credit score since then, the numbers and history will speak for itself.

If you were to evaluate all of the loans available to you, such as the FHA loans, conventional loans, and USDA loans, the most affordable and least restrictive is the USDA loans. FHA loans require lower debt ratios and higher levels of income and conventional loans would never consider an applicant with a credit score lower than 620, but even a score that low is questionable for conventional financing. If your income falls within the ranges allowed for your county by the USDA, which can be found on their website, and you have a decent credit history but not a very high score, you could be eligible to purchase a property within the USDA boundaries, which comprises a large portion of the United States, giving you many options.

Buying a home that needs fixing up can seem near impossible if you do not have the cash to pay for the home outright. No FHA, conventional, VA, or USDA loan is going to fund a home that needs expansive repairs and will not pass a uniform appraisal, so where does that leave you? The FHA has created the 203K program for situations just like these. You can now purchase a home that does not pass a standard appraisal with loaned funds and even have enough money in the loan to fix the home up! The idea behind these loans is to help rundown areas to be renovated as so many homes became rundown and vacated after the housing crisis. The 203K loan enables you to have enough funds to not only bring the home up to code and livable, but it allows for plenty of cosmetic changes as well.

203K Credit Requirements

All loans have their own requirements and the 203K loan is no exception. The one thing that it has going for it, however, is that it is an FHA loan. This means that the requirements are lenient, just like a standard FHA loan. The credit scores that are required are lower and the other stipulations that render a loan approved or denied are more lenient as well. Typically, the FHA will not back a 203K loan that has a credit score lower than 580, but many lenders will not take the risk with a credit score that low. You can shop around if your credit score is within that range to see if you can find a lender willing to take the risk, but without any compensating factors, such as a low debt ratio, stable income, or plenty of reserves, it may be difficult to find. Generally, 203K lenders like the credit score to be around 620-640 in order to be a good risk, but there is no cut and dry answer as to what score a lender will provide.

Credit History Guidelines for 203K Renovation Loans

The FHA is much more forgiving when it comes to credit history than other loan programs, such as conventional loans. It is for this reason that people without a standard credit history often turn to FHA loans and the 203K loan is no exception. If you are just starting out in life and do not have traditional credit lines that report your financial responsibility, you can use alternative credit lines for the 203K loan. The FHA typically allows you to provide proof of payments over the last year from any of the following types of vendors:

• Insurance payments
• Rent payments
• Utility payments
• Cell phone payments

The lender will typically require at least 12 months’ worth of proof that payments for these trade lines were made on time in order for it to qualify for alternative credit.

As for any other credit history requirements, the 203K loan requirements are similar to those of the standard FHA loan. You need to have a clear housing history for at least the last 12 months, whether you are using traditional credit (credit report) or alternative credit trade lines. If you have any late housing payments in the last 12 months, you will have a much harder time qualifying for the mortgage than you would if your late payments were several years ago or even if they were within the last 12 months but were on a different type of trade line, such as revolving debt. The FHA looks at your debts in this order of importance:

• Housing
• Installment loans
• Revolving credit cards and loans

If you have any serious blemishes on your credit report, such as a bankruptcy or foreclosure, a certain amount of time will have to pass before you can apply for a 203K loan. Those guidelines are as follows:

• Bankruptcy – At least 24 months must have passed since the discharge (not the filing) of your bankruptcy if it was a Chapter 7. If you filed a Chapter 13 bankruptcy and are still making payments on it, you will have to provide proof of timely payments as well as seek the approval of the trustee of your bankruptcy in order to add another debt to your plate.
• Foreclosure – In most cases, a foreclosure must be completed for at least 36 months before you can jump back into a 203K loan. There are certain special circumstances that allow you to get one sooner. This typically occurs only in the event of a spontaneous loss of a job (company closed) or a serious illness that made it impossible to work.
• Collections – Some collections can be overlooked, such as medical debt collections, but any federal debts that you have outstanding cannot be overlooked. They are required to be paid or at least to have a payment agreement in place and active at the time of application for the loan.

The minimum credit score for the 203K loan is rather broad when you look at the whole picture. There is no way to say that you will or will not get a 203K loan if you have a credit score of, 620 for example. Your credit score might be good, but you may have delinquencies that the lender cannot overlook. Remember that you are dealing with the requirements of the FHA as well as the individual lender you have chosen to use. If the lender is not comfortable taking on the risk of your loan, it does not matter what the FHA thinks. Of course, in this situation you could shop around to find a lender that is willing to take on the risk you are providing. Remember to look at the entire credit picture that you paint before applying for a 203K loan to see what you can do to make things look better and more lucrative for a lender to want to approve your loan.

Subprime home loans are typically reserved for borrowers with a credit score below 620, as that is the conventional loan threshold. These loans hold a different meaning for borrowers; however, because they offer borrowers with derogatory credit with the ability to obtain a loan. It is important to note, however, that they pay a much higher interest rate than a conventional borrower would pay. This is a Catch 22 for many borrowers because they have poor credit because they could not keep up with their other payments. Having a higher interest rate makes them more likely to default, but it is the way that the banks make up the risk that they take by providing the loan to them.

Risk Based Pricing based on Credit Score and Past Credit History

Something to understand when you are taking on a subprime loan is the type of pricing you will receive. Your interest rate will directly correlate with your credit score. The lower the score, the higher your interest rate and vice versa. In addition to your credit score, however, are the actual trade lines shown on the report and what they are reporting. The number of delinquencies you have in the last 12 months; whether or not you had a foreclosure/bankruptcy; and the number of outstanding collections reporting all have an impact on the pricing of your loan. Something to remember is that lenders look closely at your housing history, whether you pay a mortgage or you rent. If you have a string of delinquencies on your housing payments in the last 1 to 2 years, it will negatively impact the rate you are provided because you are considered a higher risk than someone that may have had a few late payments on their revolving credit as opposed to their housing payments.

Signs you Need a Subprime Loan

Your credit score is the largest indicator determining whether or not you need a subprime loan. Typically, if your score is below 620, your only option is a subprime loan, with the exception of the FHA loan. Many lenders will allow an FHA loan to have a minimum score of 580 as long as there are other compensating factors in place for the loan. For example, if you have a debt ratio that is considered low (below 36%) and a 590 credit score, a lender might be willing to provide you with an FHA loan as opposed to a subprime loan, allowing you to save money on interest. You will have to pay mortgage insurance on a monthly basis as well as upfront mortgage insurance fees; however, so you will have to weigh the pros and cons between the two loans to determine which is right for you.

Aside from your credit score, there are other determining factors when it comes to determining if you need a subprime loan. A large indicator is any delinquencies you have in your housing history, particularly over the last year. If you have more than two 30-day late payments, you will be ineligible for FHA or conventional financing. The same is true if you have one payment in your housing history over the last 12 months that was 60-days late. Other situations that limit your options to a subprime loan include a foreclosure that took place in the last two years or a bankruptcy that has not been discharged for a full 24 months. These are all automatic turndowns for conventional and FHA financing, making subprime lending your only option.

The New Subprime Loans

If you find that you are only eligible for a subprime loan, don’t think that you are stuck with ridiculously high interest rates and unpleasant terms. The subprime loans of 2015 have to meet the requirements of the Ability to Repay Rule. This rule makes lenders follow certain guidelines so that borrowers are not stuck with a mortgage that they cannot afford. What it means is that subprime loans no longer mean stated income; stated asset; or no document loans. Everything today needs to be documented whether or not the loan is being sold to anyone. Even lenders that keep the loans on their books, which most lenders do for subprime loans, have to abide by the Ability to Repay.

Now, not only do lenders have to determine if a borrower truly can afford the loan by fully evaluating their income, assets, employment, debt ratio, and credit score – lenders need to keep their fees, interest rates, and terms in line. Yes, you will still pay a higher interest rate – that is a tradeoff for taking on the risk of your loan. What lenders cannot do is provide you with any unnecessary terms, such as negative amortization, interest only payments, balloon payments, or any type of excessive fees.

Subprime loans today basically mean that you have a lower than average credit score, which for some lenders might mean below 620, while for others it might mean lower than 680. It just depends on the lender and what type of risk they are willing to take. It also means that you still have to prove certain factors, such as the need to show adequate assets to prove you can afford the loan and have reserves in the event that you need them; you have a low debt ratio; you can put down a large down payment; or you have a stable income/employment history.

No lender is going to just hand out a mortgage to hand it out. The mortgage crisis has taken that away from us. What they are going to do is operate due diligence in determining what you can afford and how likely you are to continue to make your payments. If the lender cannot prove beyond a reasonable doubt that you can repay the mortgage, no matter how high or low your credit score may be, you will not get the loan. Keep your credit score in mind when you are applying for a subprime loan, but do not forget about the other factors that will play a role in your approval or denial.

The FHA has their own requirements regarding minimum credit scores for an FHA loan. It is not a cut and dry answer, however, deciding whether or not a borrower is approved based on their credit score alone. There are many factors that go into figuring out if a borrower has an adequate credit history to ensure that the FHA loan should be provided.

General FHA Loan Credit Guidelines

In general, FHA borrowers need a credit score that is above 580. This is to qualify for the standard 97.5 percent LTV loan. This means that the borrower will put down 3.5% of the purchase price of the home as a down payment. The rest of the purchase price can be financed. If a borrower does not have a 580 credit score, it does not mean he will not get an FHA loan, it does mean, however, that he will only qualify for a 90% LTV loan rather than a 97.5% loan. In these cases, the borrower needs to determine if the FHA loan is worth it since he needs to put down a 10% down payment. The benefit of using FHA financing is typically to have the low down payment requirement. In exchange for that low down payment, however, borrowers must pay an upfront mortgage insurance premium as well as an annual mortgage insurance premium. If a person is being required to put 10% down in addition to the upfront fee, it can get quite costly and make more sense to apply for a conventional loan.

Looking at the Credit Pattern

Aside from looking at the credit score of individual, lenders are supposed to look at the actual credit history of a borrower. It is from this history that a lender can gauge the riskiness of a particular borrower. By evaluating the patterns elicited in their credit history compared to their income at the time of the history, a lender can tell how a borrower views his financial responsibilities. For example, a borrower that had enough income to cover his financial obligations yet showed a history of late payments, collections, or liens would not be considered a healthy risk. On the other hand, if you have a borrower that met with hard times, yet did the best he could and his credit score suffered, you have a different scenario. If this borrower was able to pick up the pieces and get his credit back on track, he is a healthier risk than the borrower that just did not take his finances seriously. The length of time of the delinquencies will help a lender decide what type of risk a borrower is at any given time.

Delinquent Accounts

Lenders are required to evaluate all delinquent accounts reporting on your credit report. The accounts are labeled as followed:

• Irresponsibility with extended credit and payments
• Inability to handle the debt load
• Circumstances outside of the borrower’s control (a one-time occurrence)

The delinquent accounts will then require further review once a determination has been made. This is especially true if the delinquencies were within the last 12 months. If they were 2 years or more behind the application date, they can often be ignored unless they are federal liens, a bankruptcy, or foreclosure.

Non-Traditional Credit

Since the FHA loan is often used for first-time home buyers or for those that are trying to start over in life, non-traditional credit is sometimes needed. This is for the borrowers that do not have established trade lines (typically 2 are required for at least 2 years). These borrowers can use trade lines, such as:

• Utility payments
• Rent payments
• Insurance payments

A record of paying these items on time for at least 12 months will typically suffice in place of a standard credit score. If the proof of the non-traditional trade lines is being used for qualification purposes, the lender must be able to verify the payments himself. The proof cannot be provided by the borrower as those documents could easily be made up. The lender must be able to find the address and phone number for the company that is reporting the payments on his own and be able to speak to them himself. If rental history is being used, cancelled checks cashed by your bank can be used for qualifying purposes.

The Importance of Housing History

Of utmost priority on your credit report is your housing history. When a lender is evaluating your credit report to qualify for an FHA loan, he first looks at your housing history, then your installment payments, and finally your revolving debts. Your housing history has the largest impact on the loan. The lender will look over the last 12 months of your housing history including any mortgage or rent payments made. If you state that you did not have any mortgage or rent payments, this will need to be proven in order to obtain an FHA loan as any type of delinquency on housing payments, whether mortgage or rent, in the last 12 months will disqualify you for an FHA loan.

Special Circumstances

There are certain special circumstances that are handled a bit differently when it comes to your credit and obtaining an FHA loan. These are as follows:

• A Chapter 7 bankruptcy must be discharged for at least two years
• A Chapter 13 bankruptcy must have 12 months of timely payments and approval from the trustee overseeing the case to take on a new debt
• Foreclosures must be at least 3 years behind you unless there were special circumstances surrounding them (lost job, sudden illness)
• Collections are taken on a case-by-cases basis, but for the most part they should be settled before the loan closes
• Judgments also need to be settled – if there are any federal liens they must be released before an FHA loan can be funded

In the case of a short sale, the outcome depends on the reason for the occurrence. If the borrower used the short sale process just to get out of a home that they were upside down on due to the declining market and yet stayed in the area, purchasing a home nearby for a much lower price, then that borrower is not eligible for FHA financing. Other circumstances surrounding the short sale may allow a lender to become approved, especially if the borrower made his payments on time leading up to the short sale and did not stay in the area – in other words, the move was necessary and the short sale was the only way to get the house sold.

The minimum credit score on an FHA loan will differ for every lender, just like any other loan. If you have a credit score over 580 and a fairly straightforward credit history, your credit should allow you the chance to have an FHA loan. If you have troubled credit history and a low score, it may take some time to repair the damage that was done, but if extenuating circumstances were at play, it is important to find a lender that is willing to work with you to get things turned around.