Fannie Mae (conventional lending) recently changed their underwriting guidelines to no longer factor in credit scores for underwriting approval!
Before this guideline change, borrowers needed to have a mid-score of at least 620 to qualify for a conventional mortgage. Scores below 620 could mean that someone may have to opt for an FHA mortgage, which has both upfront and monthly mortgage insurance regardless of the amount of down payment or equity with the property.
Instead of relying on credit scoring, Fannie Mae will utilize its own comprehensive analysis of risk factors to determine if a borrower is eligible for a mortgage. After the lender submits a borrower’s application to Fannie Mae via Desktop Underwriter (aka DU or automated underwriting), Fannie Mae/DU may require that we need to provide a “nontraditional credit history” (proof of making payments on time with utility bills, rent, cell phone bills, etc.) and/or they may require the borrower complete a homebuyer education course.
In addition, Fannie Mae will no longer require a minimum 720 credit score for borrowers who are financing a second home or investment property when they have seven to ten financed properties.
Does this mean that anyone with a lower credit score will qualify? No. The automated underwriting system (DU) will determine the overall “risk” of the application.
Does this mean that someone with a lower debt-to-income ratio or who has plenty of reserves (savings) or is doing a larger down payment but has a lower credit score may qualify? Yes!! A person who has other strengths to their financial profile or application, yet they have a lower credit score has better odds of qualifying now.
Does this mean that someone with shallow or limited credit may qualify now? Yes!! They too have better odds of qualifying for a conventional mortgage.
As a mortgage professional, I’ve seen countless credit reports and it’s not unusual to see a report where the credit history or activity does not make align with the credit score OR somebody doesn’t like to use credit and they prefer to pay cash instead and they are punished with a low (or no) credit score. These new guideline changes should help more people qualify for a conventional mortgage.
Don’t forget, you don’t need 20% down payment for a conventional mortgage. Some conventional programs will go as low as 3% down payment!
If you’ve been turned down before because of a credit score, you may have a better chance now of obtaining a loan approval.
If you’re thinking about buying a home, even if it’s months away – let’s talk and start making a plan!
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