February 8th, 2017 5:06 AM by Jackie A. Graves
How tough is
it to get approved for a mortgage? How low can your FICO credit score go before
your lender shows you the door? And how much monthly debt can you be
shouldering — credit cards, student loans, auto payments — but still walk away
with the mortgage you’re seeking?
You might be
surprised. New data from technology company Ellie Mae, whose loan application
and management software is widely used in the mortgage field, reveals that even
if you’ve got what seems to be a deal-killing low FICO score or you’re carrying
a mountain of debt, you still may have a shot at qualifying for a mortgage to
buy the house you want.
of these findings from Ellie Mae’s latest sampling of recently closed loan
Scores on most successful applicants
remain well above historical averages, but significant numbers of home buyers
are squeaking through with subpar scores. (FICO scores run from 300 to 850, with the upper end of
the scale indicating lower risk of default.) Although the vast majority of
lenders shy away from — or absolutely rule out — applications with FICO scores
below 620 or 640, applicants with scores that are sometimes 100 points below
are being approved and funded.
percent of all Federal Housing Administration-insured loans that closed in
December had FICO scores below 600; 3.4 percent had FICOs between 550 and 599,
and 1.5 percent scored between 500 and 549. FHA, whose role is to provide a
doorway to homeownership for applicants who might have difficulty being
approved for “conventional” loans — those eligible for sale to giant investors
Fannie Mae and Freddie Mac — still pulls in plenty of applicants with solid
scores: Thirty-seven percent of approved applicants had FICO scores of 700 to
799 in December. But the majority — 56 percent — had FICOs between 600 and 699.
even in the more exclusive conventional marketplace, there are big variations
in acceptable scores. Thirteen percent of home buyers whose conventional loans
closed in December had FICOs ranging from 650 to 699.
Debt-to-income ratios have more wiggle
room in them than you might assume.
Although the typical buyers whose conventional loans were closed in December
had “back end” debt ratios averaging 35 percent, at FHA the average was 42
percent. (The back-end DTI ratio measures a buyer’s total monthly debt
obligations, including payments due on the new mortgage, against the borrower’s
monthly gross income.) Depending on other factors in the application,
conventional lenders generally have flexibility to push the ratio to 45
percent, while FHA lenders can go considerably higher in some cases, even above
50 percent. That’s scary high for most people, but loans like these are getting
Down payments can be much smaller than
a lot of buyers sitting on the sidelines might think. The average down payment on Veterans
Affairs mortgages in December was just 2 percent — and that’s higher than VA’s
bare-minimum requirement, which is zero down. FHA’s minimum is 3.5 percent, and
the typical approved applicant came close to that, at 4 percent down. The
average conventional down payment on home-purchase mortgages was 20 percent,
but Fannie Mae and Freddie Mac both offer loans that require just 3 percent
down. A few lenders — most prominently Quicken Loans — have cut that to as
little as 1 percent down.
So how do
buyers with subpar FICOs, skimpy down payments and high DTIs manage to get a
mortgage? The key is this: They don’t have these negative factors rolled into
their applications all at once. If they did, they’d be rejected.
got a weak FICO, they need strong compensating factors to counterbalance the
credit-score deficiency. Maybe it’s a larger down payment than typical, a
lower-than-average DTI or higher bank reserves. Maybe you’ve got a co-borrower
with solid financials to ease the lender’s concerns. Maybe you are able to
afford a slightly higher rate on the loan. Whatever the compensating factors
are, you absolutely need them.
president of Total Mortgage Services, a Connecticut-based lender active in 44
states, told me, “It’s all about the total picture,” not just one glaring
negative. “The whole application has to make sense.”
So if you
look terrible in one area of your application, don’t give up. If you can bring
other strengths to the table, you’ve got a chance — even in a tough lending
By Kenneth R.
Harney - To view the original article click here