Loans get more complicated every month. I no longer try to explain details to my clients, I send them straight to the source. Here is some good info and commentary.
Thanks to Jeff Belonger!
There has been a lot of talk regarding Credit Scores in the last week after FHA came out with Mortgagee Letter 2010-29 on FHA Loans. Here was my post showing such changes with an explanation. Jeff Belonger's cheat sheet for ML 2010-29.
In my opinion, some of the confussion and or arguement with the new FHA loan changes is that FHA says that you can go down to a 500 credit score with 10% down. FHA even says that you can put the minimum down of 3.5% with credit scores of 580 and above.
Here is the problem with all of this. Just because FHA allows this on FHA mortgages, it doesn't mean it will happen. One needs to clearly understand how this all works and what is out there. I hope to clear the air with this post, and make it "simplified".
I wanted to share some of the comments from the other post, A simplified version of the new FHA credit score guidelines.
"It appears that several commentors have said that they have gotten sub-580 buyers approved... so I guess it goes back to BEING a rumor." - I read every comment twice and this was the only comment I found by a loan officer. "None of my FHA lenders will touch any borrowers with a score less than 620, so this new FHA ruling really does not matter much. Of course there are a few lenders out there that will work with a sub 580 borrower..pulling teeth with these lenders and clients if you ask me." - There is? Where? There use to be, but over 6 months ago. I sent him an e-mail to see if he could give me a name of just 1 lender. It's not 6:05 pm and nothing.
"Good overview, Karen. Nice an simple. Anything over 500 and you can get a loan. Thank goodness." - Ouch... I read sereral comments that were like this one, hence why I had to write about this again. My main problem, simplified or not, people reading this post, especially the consumer, will think that there are some lenders that can go down to 500. And what will happen is that they will shop for this, without understanding that even if this could be done, it would cost the borrower a lot more money than what might not be explained to them. I will explain this below.
"I have herd so many different versions of the requirements for the 580 and below. I can't even find a lender in my area offering any loans under 580." - Because they don't exist anymore. About 2 years, I could underwrite a FHA loan down to 500, even when many lenders couldn't. The problem with this statement, this realtor thinks it's possible because she is hearing bits and pieces. There is a reason why most lenders require a 620 or higher. So at any time, the loan could be sold through the secondary market on Wall Street. The Wall Street investors aren't taking anything less.
"Thank you for the "Simplified Version" for this "Simplified Realtor"! Now. we need to find some "Simplified Lenders" as nobody in my area wants to talk to a buyer under 620!" - In my opinion, this is a realtor that is just not educated about credit scores in general, which I will talk more about in part 3. Don't most people understand that lower credit scores usually represent someone that has bad credit, who didn't pay their bills, missed many payments, and could be considered a credit risk. Yes, things do happen, and if explained correctly with proof, there can be exceptions. FHA does allow for some exceptions, that if met, the lender can still close that loan.
"By reading this an agent might answer "Can I get a mortgage with a credit score of 540?" The informed, intelligent answer is "Technically...yes. Realistically...not likely." :) " - Not likely? The answer should be, "not at all". We need to stop fooling ourselves and leading consumers on. This kind of stuff is black in white. One of the problems with all of this is that realtors don't know how expensive this can be to the buyer, even if they could get a FHA loan with a 580 credit score. I will show this below.
Here is a simplified comment by a realtor which shares my same thoughts. "A well simplified blog about the FHA program. I think however that you should have expanded on the mortgage reqirements to obtain this type of financing." - That was my main argument throughout the post. And the ones that typically agreed with this were loan officers. This inspired me to write - FHA loans with a simplified explanation of credit scores -
You want reality now? Check out these numbers and how expensive reality can be....
*** DISCLAIMER - The comparison chart above is to be considered the best case scenario. As mentioned, there are several lenders that will allow down to 580 credit scores for FHA loans. This was compiled from speaking with 7 loan officers from all over. There are a few lenders whose rates are about a 1/4% higher and some that would charge an additional 1 to 2 points based on the loan amount. All this would do is add more to the upfront costs and increase the monthly payment. ***
As indicated in the chart above for a $250,000 loan amount, if you even had a 599 credit score, you would have spent $192.22 more a month. In 5 years, this would be a total of $11,533.20. On top of that, because of the lower rate, your principal balance would have been reduced by a total of $4,075 in 5 years. This would give you a grand total of $15,608.20 in 5 years. All I can say is WOW.
You need to read part 2 right now to get the intense reasoning of why this can even become more difficult if you aren't educated with the correct information or more details. And just food for thought... this post was 395 more words than the simplified post. Would you want a shorter post that has some holes in it or could be construed as misleading because of the lack of explanations, or a little longer post that clearly gives you the details with explanations, facts, and examples. I know what I would want as a consumer.
The FHA Loan Credit Score Series -
- FHA credit scores - Your credit scores aren't the only thing that determines your mortgage approval - Part 3 of 3
Some of you might be asking about conventional loans then. You can't do a conventional loan with less than a 620 credit score. And I wrote this post and a series of posts comparing FHA loans vs Conventional loans with different credit scores and down payments.
- FHA Loans vs Conventional Loans - Proof that FHA home loans with 5% down after major change are still cheaper 09-01-10
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