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Credit Scores

The Role of Credit Scores

Credit scores are half of what determines the interest rate.  But it’s not quite: the lower your credit scores, the higher your interest rate.

Because some credit scores were created equal.

I mean, there is no difference, in terms of impact on a borrower’s interest rate, between 622 and 624, 687 and 688 or 686, 723 and 725, for instance.

But there is a huge difference between 619 and 620, 639 and 640, for instance.

First, some lenders just don’t lend to people with scores under 620 (others do not lend to people with scores under 640).  (Four years ago, almost none lent to people with scores under 640.  In a few years, it might be the case again…  The exact score changes, depending on how optimistic lenders feel about the economy and the world’s future.)

Those that do lend under 620, do it through what they call Specialty Programs.  Which is another way of saying, higher interest rate and more stringent rules.

As regards FHA, some lenders don’t go under 620, some don’t under 580.

The more-stringent-rules that makes the biggest impact on a borrower are the qualifying ratio and the down payment / equity (as a percentage of the value of the home).

Since home loans come with compound interest and are amortized over many years, credit scores are very important

Call 847-840-8884 now if you’d like to get a conforming or FHA loan.

Qualifying Ratios and Credit Scores

Non-Specialty Mortgage Programs

Conventional Conforming Loans

The minimum monthly payments on all of a borrower’s debt payments can equal 45% of their gross monthly income for conventional conforming loans.

Fannie Mae says it allows up to 50%, with strong compensating factors.  However, I’ve seen hundreds of conforming loans and have yet to see one that’s been approved with a debt-to-income ratio higher than 45% and change.  (And change means, I’ve seen 45.11% and 45.20% but nothing that did not start with 45.)

And that is going to drop to 43%.  The Frank/Dodd rule came into effect in 2014 and it limits the DTi (debt-to-income ratio) to 43%.  It is not 43% yet as the rule allows for a transition period. (I’m writing this article today, May 3, 2016.)

So, if you’re going to go for a conventional loan, your total minimum debt payments cannot be higher than $450 for every $1,000 of your gross monthly income.

With conforming loans, there isn’t much emphasis place on the maximum housing expenses (principal, interest, property taxes and hazards insurance). With FHA loans, though, they cannot exceed 47% of the gross income.

Call 847-840-8884 now if you’d like to get a conforming or FHA loan.

FHA Loans

The FHA allows the minimum payment on all the debt a borrower has to be as high as 56%.  The housing payments cannot exceed 47% of a borrower’s monthly gross income.

FHA loans require the housing payments (principal, interest, property taxes and property insurance) to not exceed 47% of a borrower’s gross income.

The loan amount can be as high as 95% for  most conventional conforming loans (MyCommunity loans can go as high as 97%).

Call 847-840-8884 now if you think you cannot get a loan because of your low credit scores but would like to get one, anyway.

Specialty Mortgage Programs

The loans that fall under specialty mortgage programs are either government-backed loans or conventional, non-conforming.  That means Fannie Mae and Freddie Mac have nothing to do with them.

The FHA specialty programs limit the qualifying ratios (DTI) to 31/43.  That means, the housing payments only cannot be higher than 31% of a borrower’s gross monthly income and the total minimum debt payments cannot exceed 43% of that income.

In addition, the loan cannot be higher than 90% of the value of the home.

Conventional Loans for People with Bad Credit

There are, comparatively speaking, few and the rules change from lender to lender.  Usually, they’re far too expensive.

Call 847-840-8884 now if you think you cannot get a loan because of your low credit scores but would like to get one, anyway.