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Credit Grades - Where Lenders draw the line
Know what your Credit Score is and how it is going to affect your mortgage in advance. With the advance of technology those all important credit scores now put you into a "credit grade" and are divided into categories by strict guidelines.
This technology is good, but the advances have made it so that Credit Scores are truly a determining factor in whether you get a rate or can qualify for a program. This is not a negotiable factor. If you need to have a 620 score to qualify and your score is 619 this truly is a hurdle that is very, very difficult to get over. It does not always mean that you will not get a loan at 619, but the interest rate and terms will be considerably worse.
There are seven credit grades. Here is an explanation of where the breaks are and what each credit grade will mean to the documents required and rules you may have to follow. These are only general guidelines, but will fit in most situations.
Note that lenders will look at all 3 credit bureaus and take the middle score in determining which credit grade you fall into, throwing away the high and the low scores. Some Sub-Prime Lenders will take the lowest of two scores or an average of the score.
What a Lender uses Credit Scores for:
Lenders consider the score to be a number that rates the likelihood an individual will pay back a loan. The score looks at the following items:
Credit Scores have become a determining factor in
The 7 Credit Grades for a Mortgage
- 720
and above
- A borrower with a score 720 and above is an A+ loan.
- You will have all the choices and get the best rates and the fastest closing times
- If this loan does not fit guidelines, underwriters may be willing to make exceptions based on past credit
- 680
- 720
- A borrower with a score 680 to 720 may be considered an A+ loan.
- When this loan fits within guidelines, this will be a quick, smooth process.
- The loan will involve basic underwriting, probably through a "computerized automated underwriting" system and be completed within minutes.
- Borrowers falling into this category may have a good chance to obtain a lower rate of interest and close their loan within a shorter time.
- There may be additional documents required at these scores
- 660
- 680
- On the border of A- pricing. Guidelines for these scores have more rules
- Your choices will be limited for the best rates. List of available lenders shrinks.
- Restrictions are placed on Cash out refinancing, Self Employed borrowers and Low Doc Loans
- Explanation Letters may be required
- More documentation may be required
- Additional time to close these loans due to possible manual underwriting
- 620
- 660
- A score below 660 but above 620 may indicate underwriters will take a closer look at the file in determining potential risks.
- Borrowers falling into this category may find the process and underwriting time no different than in the past, but additional documents may be asked for.
- Supplemental credit documentation and letters of explanation may be required before an underwriting decision is made.
- Loans within this FICO scoring range may allow borrowers to obtain "A" pricing, but loan closing may still take several days or weeks as it does now.
- 580
- 620
- Borrowers with scores in this range are typically referred to as B/C borrowers
- Your mortgage will usually come from a sub-prime lender.
- The traditional underwriting process will be followed and supplemental documentation will almost always be required.
- This scoring range will require you to pay higher that the best loan rates.
- Loans in this scoring range will take several weeks to close.
- Origination Fees often are charged with these loans
- 500
- 580
- Borrowers with a score below 580 will find themselves locked out of the best loan rates and terms offered.
- This is sub-prime. Mortgage professionals will divert these borrowers to alternate funding sources other than FNMA and FHLMC (Fannie Mae & Freddie Mac).
- Interest Rates will be higher, although points could buy you back down to the current range of rates.
- Expect a longer time frame for closing and work with your banker.
- These mortgages are manually underwritten. Additional documentation and explanation letters of credit problems are likely to explain your unique situation to the underwriter.
- Origination Fees can be expected for additional time involved to approve these loans
- 500
and below
- Borrowers with a score below 500 will find themselves unable to obtain a mortgage. There are exceptions, but few.
- At this point, you should really work on improving the credit scores. If you do find a lender, interest rates may be no better than a credit card.
- Should you find yourself in this situation, you are likely behind on many bills and it will take time to catch up, but you will be pleasantly surprised to learn that most companies will work with you and help you to get caught up and back on your feet.
As more companies utilize credit scoring, the loan approval and closing time will be compressed for most consumers. In the future, a high FICO score may be your ticket to a speedy and competitively priced mortgage loan.
When you have scores above 720, you will have all the choices and can demand a fast mortgage with the best rates.
When your scores are lower than 720, the importance of the experience and expertise of your mortgage professional will grow and so will the requirements placed on you. Work with your mortgage professional, provide what they need and expect them to come back with more requests for information.
Above all, do not blame your mortgage professional if you have lower scores. They did not extend the credit, make a late payment or fill the credit cards. Ask for explanations and how to improve the scores and which accounts may have pulled that score down.
I work with all grades of credit scores, and give honest straightforward answers to questions. If you find yourself on the edge of a credit grade, working with your mortgage professional to improve the scores and waiting 2 or 3 months may make a difference in the choices you have.
Please call or email if I can help with advice whether you are a client of mine or not.
|
Harry
Smith
email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000 |
Drew
Smith
email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770 |
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