First time homebuyers are in a great position to get great rates and lucrative terms on their mortgage today. What used to be a very restrictive mortgage industry is finally loosening up to make it easier for many people to get a mortgage no matter their situation in life. Of course, with every loan comes the need to have a minimum credit score. There are some loan programs, such as FHA and VA loans that offer the ability to provide alternative credit lines in the place of a traditional credit score. These programs allow you to use your insurance payments, rent payments, and even utility payments as proof of your financial responsibility. Some lenders that offer manual underwriting of conventional loans may even allow for nontraditional credit, but you have to check with each lender to see what they will accept as every lender has their own requirements.

General Minimum Credit Scores Required for Mortgage Loans

If you had to put your finger on one magic number that would render you the ability to get a loan as a first-time homebuyer, it would be 620. That is the number that once you go below, lenders start to cringe at your loan profile. This does not mean that it is impossible to get a mortgage if your score is lower. It does mean, however, that you are going to have to work harder; be okay with being scrutinized harder; and be ready to pay higher interest rates or fees. Overall, lenders want to see higher credit scores because it means that you have not met with financial demise in the recent past because lenders know how hard it is to bring your credit score back up after it falls. Because this is unfortunately not the case for many people, there are many options for first-time homebuyers that are finding it harder to get a conventional loan than they thought.

FHA Loan Credit Score requirements for First Time Home Buyers

If you are turned down for a conventional loan because your credit score is below the ever so sought after 620 (or higher for some lenders) you still have the option of the FHA loan. This loan offers the ability to put down a small amount of money – only 3.5% and to get the financing you need with a lower credit score. As long as your credit score is not below 580, you may apply for the FHA loan. If your credit score is below 580, you are still not out of luck; you will have to put down more money on the loan however. The FHA sets the bar at 580 for the 3.5% down payment. If your score is below that, you will have to put down a minimum of 10% on the loan. This can be difficult for first-time homebuyers to do since they are coming up with the cash on their own rather than using the equity from another property to put down on the home.

VA Loan Credit Requirements  for First Time Home Buyers

If you are a veteran (or your spouse is a veteran), a VA loan is a great option. The minimum credit score for the VA loan is typically around 620. Again, this is up to lender discretion as some lenders will go as low as 580 on a VA loan. What the VA wants to see, however, is very few delinquencies in the last 12 months on your credit report. Because you are a first-time homebuyer you will not have to worry about the VA’s requirement to have zero late housing payments in the last 12 months, but if you were renting, beware that they will check your rent history whether or not you are using alternative trade lines to qualify for the loan. As far as your other trade lines, a maximum of one 30-day late payment is typically acceptable to qualify for the VA loan which requires no down payment and offers very low interest rates.

Conventional Loan Credit Requirements  for First Time Home Buyers

Conventional loans are typically the hardest to qualify for, especially when you are trying to purchase your first home. This loan requires great credit scores – they like to see them average around 620 in order to qualify for a conventional loan. In some cases, loans with scores lower than 620 can qualify, but they need to have mitigating factors that make their loan profile appealing. These factors could be a low debt to income ratio (the standard is 28% housing payment ratio and a 36% total debt ratio); longstanding, stable employment; steady income; or a large down payment. If you mitigate the risk that the lender is taking on your low credit score with other positive factors, they are often willing to provide the loan. It is all about providing balance and proving that you are not planning to become delinquent on the mortgage the lender is providing.

If you do take a conventional loan for your first home purchase and you do not put down at least 20 percent on the home, you will have to pay monthly mortgage insurance. The amount of the insurance is based on the loan-to-value ratio and your credit score. The lower your credit score, the riskier your loan becomes and the higher your mortgage insurance payments will be in order to protect the insurance company should they have to pay for your loan in the face of default.

Your credit scores play a vital role in your ability to be a first-time homebuyer. If you have average scores that are no lower than 620, you have many options for a variety of loans as long as your credit history is not blemished with several late payments in the last year. Remember that lenders can look back at your credit history as far as 2 or 3 years ago, so be prepared to have answers for any delinquencies and issues that you have reporting on your credit report. The more prepared you are, the easier it is to get through the mortgage process.

Purchasing a second home can be really exciting. Whether it is a summer home that you use to escape the cold weather or a cabin up North where you can enjoy fishing, water sports, and hiking, the excitement is all the same. Before you set out to purchase your second home, however, you have to know the stipulations that the mortgage companies set forth. Purchasing a second home is a little tougher than purchasing your first home because there is a higher level of risk for the lender. If you were to meet with financial demise, chances are you would do everything you could to keep your first mortgage afloat, while letting the mortgage on the second home become delinquent. Because of this higher level of risk, there are more restrictions on who can and cannot purchase a second home.

Fannie Mae Mortgages for Second Home Purchases

Conforming mortgages, or those that are backed by Fannie Mae, have similar guidelines to the purchase of your first home. They will very rarely entertain a loan application for a second home that has a credit score below 640 and that is if the loan-to-value ratio on the loan is less than 75%. This means that you are putting down 25% on the home. If the loan-to-value ratio is higher than 75%, the credit score minimum is 680. Of course, there are lender overlays and exceptions to these rules, especially if you have compensating factors to make up for the lower credit score – each lender is different so you will have to shop around.

Conventional lenders will look at a variety of things in conjunction with your credit score including your debt ratio, amount of the down payment, length of employment, stability of your income, and the amount of money you have on hand for reserves. A good example of a compensating factor would be: a borrower that has a 650 credit score and is borrowing 78% but has 12 months of reserves in the bank and a debt ratio of 34% on the back-end. The reserves and lower than average debt ratio (the average is 36%) makes the loan less risky, affording some lenders to provide the loan despite the lower credit score. Of course, if your credit history is blemished with many recent late payments, especially late housing payments, the loan file more than likely be declined.

Subprime Loans for Buying Second Homes

If you do not qualify for conventional lending because your credit score is below the 640 threshold and you do not have any compensating factors to make your application enticing, you may qualify for a subprime loan. These loans used to make people cringe because of the fact that many shady lenders took advantage of these borrowers that were in the lurks for whatever financing they could find. Today, there are regulations surrounding even subprime loans. The Ability to Repay Rule makes it easy to ensure that you are not being taken advantage of despite your lower credit score. This rule prevents the use of poor financing choices, such as interest only loans or negative amortization making it impossible to ever get ahead. Today, subprime loans have to be thoroughly evaluated to ensure that the borrower can afford the fully amortized payment. They are also required to keep the interest rate and fees in line, not crossing over the threshold of being outrageous.

Many people looking to purchase a second home find that they need subprime lending because FHA and VA lending is not available for second properties. These mortgage programs are restricted to primary residences only except in very unique circumstances. This means that borrowers that may have turned to FHA financing for their first home because their score was lower than conventional guidelines allow may have to turn to subprime lending for their second home. This is often true for borrowers that have a blemished credit history, including late housing payments; foreclosures; or bankruptcies. Conventional loan guidelines are very cut and dry when it comes to situations like that, whereas subprime lending has more leeway since the loans are kept on the books of the lender providing the funds, so they have a larger say in what they can and cannot accept.

There is not a minimum credit score per se, for subprime loans; every lender will have their own threshold. What they will look at, though, is the full picture of what you are providing. If you have a primary residence that you have made late payments on throughout the years, you do not paint a pretty picture for a mortgage on a second home. On the other hand, if you have cleaned up your credit history and have not had any late housing payments in the last few years and your debt ratio is in line, many subprime lenders will happily provide a mortgage for the second home.

If you are in the market for a second home, you will have to do your research. Start by finding out your credit score as that will play a vital role in the options you have. If you have a credit score that is below 640, you can either start improving your score by taking care of collections; making your payments on time; and paying off excessive revolving debt or go right to a subprime loan. Remember to shop around for those subprime loans; however, as every lender has a different idea of what type of risk they want to take into their portfolio. You can compare rates and fees for various lenders without hurting your credit score if you apply for the mortgages with various lenders in a short period of time – typically a two week time span. This way you know what your options are and can compare “apples to apples” so to speak as you try to figure out the best way to afford a second home.

Purchasing an investment home can be a great way to make money for many people. The key in making money, however, is securing affordable financing that does not make it hard to either rent the property out or to sell it in the near future after fixing it up. Because this home is not your primary residence, lenders are a little tougher with the restrictions they provide. They look at investment properties as a much higher risk for themselves as you are more likely to default on an investment home mortgage than you would on the mortgage for your primary residence.

Fannie Mae Mortgage Credit Guidelines for Investment Homes

Many people prefer to use conventional financing for their investment home. It makes sense since the interest rates are typically low and the fees are greatly regulated, making it easy to afford the loan. Unfortunately, it is more difficult to qualify for an investment property conventional mortgage. The minimum credit scores that are put in place are higher than you would find for subprime mortgages and you also have to have a certain amount of reserves in place in order to make up for the riskiness of providing financing for a home that you will not live in or use.

If you plan on putting down more than 25% of the purchase price of the investment property, you have a little more leeway on the minimum credit score. The way that Fannie Mae determines the minimum credit score for investment properties is to evaluate not only the amount of the down payment you are using, but also the amount of reserves you have on hand. The greater amount of reserves you have on hand, the less risky your loan profile becomes. Fannie Mae’s guidelines are as follows for LTV’s less than 75%:

• Debt ratio less than or equal to 36% and at least 6 months of reserves – Minimum score 640
• Debt ratio between 36% and 45% and at least 6 months of reserves – Minimum score 660
• Debt ratio between 36% and 45% and at least 12 months of reserves – Minimum score 640

Fannie Mae’s guidelines for LTV’s greater than 75%:

• Debt ratio less than or equal to 36% and at least 6 months of reserves – Minimum score 680
• Debt ratio between 36% and 45% and at least 6 months of reserves – Minimum score 700
• Debt ratio between 36% and 45% and at least 12 months of reserves – Minimum score 680

These guidelines are based on what Fannie Mae allows, but every lender can have their own requirements as they are the ones providing the funds. Some banks are willing to take the risks that Fannie Mae allows, while others will require higher credit scores and/or more reserves in order to make up for the risk that investment properties bring.

Subprime Mortgages for Investment Properties

If you are unable to qualify for a conventional loan for an investment property, another option you have is a subprime loan. Even those these loans are known to have higher fees and/or interest rates, they provide you with the ability to purchase the investment home and make money, especially if you are going to sell the home for a profit down the road. If you plan on keeping the home and renting it out, careful consideration will have to be taken regarding the amount of rent you can charge on the home in order to make a profit. If you are taking the loan for the short term, however, and plan on selling it, you can take the higher fees and interest because you will not have to pay the interest charges for very long.

Subprime loans are less focused on credit score and are more focused on the entire financial picture you provide. Basically, if your score is below the above thresholds, you will have to turn to subprime lending. Some subprime lenders will accept scores as low as 540 (or lower) depending on the other circumstances you provide. If your debt ratio is low, you are a lower risk than someone with a low credit score and a high debt ratio, which is a sign of financial irresponsibility. Every lender has their own threshold on what they will accept though. If you find a lender that is willing to accept a low credit score, expect to need excessive reserves on hand or to put down a large down payment to make up for the riskiness of the loan.

Another factor subprime lenders will look into is your credit history, namely the housing history. If your past is blemished with many late payments on your housing, whether mortgage or rent, obtaining an investment property will not be very likely. If your housing history is clean, however, but your revolving credit has late payments, that can often be overlooked as long as it was not during the last 12 months or if there were only one or two late payments during that time.

FHA and VA loans are not an option for investment properties, unfortunately. Even though they provide lucrative finance terms and the ability to make low down payments, FHA and VA strictly providing funding for primary residences as it is their duty to provide adequate housing for those that would otherwise be unable to afford it.

If you are considering the purchase of an investment property, it is important to weigh all of your options. The government oversees the regulation of subprime loans with the Ability to Repay regulations, keeping interest rates and fees in line on subprime loans. If you are able to qualify for conventional lending, that will typically be your best option unless you have to pay private mortgage insurance for having a loan-to-value ratio over 80%. Because conventional loans are capped at an 85% LTV for investment properties, the amount of the private mortgage insurance will be lower and the amount of time it must be paid will be minimal, making it an option that you should weigh when determining which loan will allow you to be the most profitable in your purchase of an investment property.

When you have past credit issues, such as bankruptcies, foreclosures, or short sales, it might seem like you will never get a mortgage again. The good news is that you will get a mortgage; it just might take a little time. The regulations used to be pretty tough, making borrowers wait many years before being able to be a homeowner again, but things have lightened up and many people are realizing their dream of becoming a homeowner much sooner than they ever thought possible. The minimum credit score for any type of loan is typically not the issue for people with past credit issues; the real issue is how much time has passed since the incident occurred.

Minimum Credit Scores for Residential Loan Programs

Every loan program has a minimum credit score or a threshold that they will allow for someone to be eligible for a loan. There are many other factors that play into whether or not you are actually eligible though. The hard and fast numbers for the loan programs include:

• Conventional loans – Credit scores below 640 are generally not allowed, but the 640 minimum does not apply to everyone; it is reserved for those with a low LTV (less than 75%) and debt ratio less than 36%. If your LTV or debt ratio is higher, the minimum credit score increases accordingly with the highest minimum for a conventional loan being recorded at 700 if your debt ratio is between 37% and 45% and your LTV is greater than 75%.
• FHA loans – The minimum credit score for FHA loans is 580 if you want to be able to put down just 3.5% on the home. If your credit score is between 500 and 579, you may still be eligible for an FHA loan, however, you will be required to put down 10% on the home.
• VA loans – The generalized minimum credit score for VA loans is 620, but it varies by lender. This is the minimum credit score set forth by the VA, but many lenders will require the score to be higher unless there are many compensating factors in place, including a low LTV and low debt ratio.
• Subprime loans –Non-conventional loans do not have a minimum credit score per se. It is up to each lender and the risk they want to take. Generally, they want credit scores above 600, but that does not mean that someone with a credit score of 580 with a low debt ratio and high down payment will not be approved for this type of loan.

Bankruptcy

If you have a bankruptcy in your past, you have a certain length of time that the bankruptcy must be discharged in order to obtain each type of loan. Having a BK does not exclude you from any type of loan, even a conventional loan. What matters is that you meet the minimum credit score requirements and have passed the proper amount of time. If you have a Chapter 13 bankruptcy and are making payments on it still, you may be able to get a new mortgage as long as you have been making payments for at least 12 months; each payment has been on time; and your trustee overseeing the BK approves the addition of a new debt. If you have a Chapter 7 bankruptcy, the following guidelines must be followed:

• Conventional loans – Loans provided by Fannie Mae or Freddie Mac have the best terms and lowest fees and they just lowered their waiting period times for loans after bankruptcy. It used to be a four year waiting period, but it is now just two years from the date your bankruptcy was discharged to apply for a conventional loan.
• FHA loans – These government backed loans are getting easy to obtain after a BK. Today, the wait is just two years after the date of discharge of the bankruptcy.
• VA loans – The loans provided to the veterans of our country also only requires a 2 year waiting period following the discharge of the BK.
• Subprime loans – Loans that are not backed by the government are the easiest, yet often most expensive loans to obtain after a BK. As long as 24 months has passed since the discharge of the Chapter 7 BK, you can apply.

Foreclosure and Short Sale

Losing a home is never a pleasant experience, but lenders want to make sure that it is definitely behind you before making you a homeowner again. They want to see your credit bounce back and your rental history to be pristine. The guidelines for obtaining a mortgage after a foreclosure are similar to those of a bankruptcy:

• Conventional loans – The dreaded four year wait is now over; borrowers must wait only 2 years after a foreclosure and/or short-sale to apply for a conventional loan.
• FHA loans – The FHA requires a slightly longer waiting period for foreclosures and short-sales than they do for bankruptcies. This is because they take housing history as a very serious component of your risk profile. The FHA requires a 3 year waiting period after a foreclosure unless you had extenuating circumstances.
• VA loans – Just like the FHA, the VA requires borrowers to wait a period of 3 years following the foreclosure or short-sale of their home to apply for a new VA loan.
• Subprime loans – Most subprime lenders will require a waiting period of 2 years following a short-sale or foreclosure.

FHA Back to Work Program

The FHA does have a program for extenuating circumstances and a serious financial event. This pertains to borrowers that suffered a bankruptcy, foreclosure, or short-sale as a result of the recession. These borrowers are said to have extenuating circumstances and as long as they can prove it as well as prove that they have fully recovered, they may be able to forgo the above waiting periods for FHA loans and get a loan sooner. The conditions surrounding this program include:

• Your income must have decreased by at least 20% during the recession due to a loss of job, downsizing, or other extenuating circumstances.
• You must have experienced a foreclosure, bankruptcy, or short-sale.
• You must show a full recovery from the economic event that caused you financial distress.
• You must take housing counseling prior to taking on a new FHA mortgage.

If you qualify with the above circumstances, your waiting period is decreased to 12 months for either a bankruptcy, foreclosure, or short-sale for an FHA loan.

It is possible to bounce back after an unfortunate financial disaster that caused you to lose your home or write everything off. As long as enough time has passed; your credit has recovered; and you understand the ramifications a new mortgage can have on your financial life, you should be able to obtain a new mortgage and start your home ownership all over again.