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.