The three key elements for loan approval are income, credit and property.
Borrower income must be sufficient to pay for the mortgage, as well as all other debts and monthly obligations.
The property to be purchased must not cost more than its appraised value.
And, most important, the borrowers’ credit score must not be less than authorized by the mortgage lender.
In most cases, credit scores above 680 are acceptable for mortgage lenders. National banks and national lenders often advertise that score as their base requirement for loan credit approval. And, in fact, with that score a borrower can feel comfortable with credit approval from any lender.
However, a credit score of 680 is not the base requirement for loans insured, guaranteed or purchased by national secondary markets, the ultimate investors for mortgages from lenders. Fannie Mae and Freddie Mac set a base credit score of 620 for their conventional loan purchases. USDA will accept scores down to 580. FHA will accept scores down to 500. And, VA does not state a minimum score, but emphacises common sense credit underwriting for borrowers.
The question then becomes, which lenders will adopt the lower credit scores of the secondary mortgage markets, their ultimate investors?
Lenders can choose whichever credit score they desire, so long as it is not less than that required by the secondary market. Large lenders often set their own requirements for loans ( “add ons”), which they feel comfortable with. They have enough applications to not be damaged by rejecting borrowers with credit scores less than their self-imposed ones. ( They can be damaged if they sell too many non-performing mortgages to the secondary markets.)
However, borrowers are often confused with these add-ons, believing that they will not be approved by any lender if they are initially not accepted by the banks or national lenders. This is not accurate; there are many lenders that will accept the lower credit scores. It is the borrowers’ responsibility to search for lenders that will accept their credit scores. This can be difficult, as add ons are myriad. Some lenders have different credit requirements for different loan types.
A few lenders – like All Credits Mortgage Company–do not impose add ons, and choose to go with the base requirements of the mortgage secondary markets. The risk may be higher, but the volume of business is greater.