Editor’s note: Before we get into the details of this story, I’d like to stress that the mortgage-lending industry is rarely standardized across the board. Borrowers should not be discouraged by the comments made below. It never hurts to apply for a loan, regardless of your FICO score. It’s the only way to find out where you really stand.
Mark Zandi, the chief economist from Moody’s Analytics, recently spoke with Michael McKee and Sara Eisen on Bloomberg Radio’s On the Economy. At one point, he was discussing how mortgage lenders are still being fairly tight with credit. He said most of them are requiring a FICO score of 750 or higher on mortgage loans.
This would be noteworthy (if accurate), since more than half of all Americans have a score below 750. So they might not qualify for a home loan under a supposed 750 FICO requirement.
“To get a mortgage loan you have to have a 750 FICO,” Mr. Zandi said. “Even to get an FHA loan, because of the overlays on the FHA program that the banks are imposing, you need a 750 FICO score.”
An “overlay” is when a mortgage lender imposes a stricter requirement on top of the minimum requirements established by the FHA (in this case). Learn more about lender overlays.
He went on to point out that the median credit score in the United States is 700. This means half of the consumers in this country have a score above 700, and the other half are below 700. Most lenders, according to Zandi, are lending at FICO 750 and above.
Does this statement accurately reflect conditions in the “trenches” of the mortgage world? We will explore that in a moment. But first, some definitions are in order.
The FICO Score Defined
Mr. Zandi mentioned the FICO score in particular, which is one of several scoring models used to produce consumer credit scores in the U.S. These computerized models use the raw data from a person’s credit report to produce a three-digit number. The FICO score was developed by the company of the same name (formerly known as Fair Isaac Corporation). The FICO scale goes from 300 – 850, where a higher number is better.
The three credit-reporting companies in the U.S. — Experian, TransUnion and Equifax — have a joint scoring system known as the VantageScore. They created it largely to compete with FICO. To date, however, most mortgage lenders rely on the FICO score when screening loan applicants.
Mortgage lenders and other creditors use these scores to analyze the risk of lending to a particular borrower. A person with a history of shaky borrowing (for example, failing to make payments on time) will generally have a lower score. People who pay all of their bills on time will have comparatively higher scores. The higher the score, the lower the risk — statistically speaking.
[See also: 5 factors that determines your credit score]
So the credit score partly determines (A) whether or not a person can qualify for a mortgage loan, and (B) what interest rate the lender will offer. These two things are equally important to borrowers.
Many Lenders Use 640, Not 750, as a Minimum FICO Score
The question is, how accurate is Mr. Zandi’s statement? Are most lenders indeed requiring a FICO score of 750 or higher for mortgage loans? And what about the FHA program? How does it compare?
To get some more insight on the subject, we spoke to Chad Baker, a loan officer with Prime Lending. Mr. Baker specializes in purchase loans and works in the San Diego area. His company works with borrowers using both conventional and government-backed mortgages. (Note: We have no vested interest in this company whatsoever.) We asked him the following questions:
- For conventional mortgages, have you seen a trend where lenders are requiring a FICO score of 750 or higher?
- For FHA loans, are some lenders indeed imposing overlays on FHA loans with a FICO 750+?
In other words, we asked him if he felt Mr. Zandi’s statement was accurate. Here is some insight from the “trenches” of the lending industry.
Regarding conventional mortgages, Mr. Baker stated:
“There have been many changes in residential mortgage finance over the past 24 months. Programs have disappeared. Stated income, Alta A, or limited documentation loans are a distant memory. One thing that has not changed is the FICO score requirements for conventional mortgage loans. PrimeLending is issuing Fannie Mae backed conventional loans with credit scores as low as 640.
Regarding overlays on FHA loans, Mr. Baker stated:
“I have never heard of any lending institution placing an FHA overlay of 750+ … FHA is back in full force and has positioned itself as the new ‘sub-prime mortgage.’ PrimeLending will provide FHA financing down to a credit score of 600. There are mortgage banks that are providing FHA financing below a FICO score of 600. FHA has limited its requirements for condo financing and has increased their required monthly mortgage insurance, but raising credit requirements has never been anything we have heard of.”
Mr. Baker’s comments echo the conversations we have had with other lenders. Most said they would offer conventional loans to borrowers with FICO scores in the 620 – 640 range or above (as long as the person qualified in other areas, such as income and debt). A borrower might need a score of 750+ to qualify for the lender’s best rates. But for basic mortgage approval, the bar is typically set lower — closer to the 640 range mentioned above.
“Mark Zandi is a very well educated economist and was instrumental in calling out the imposing crash of the housing market before it happened,” Mr. Baker added. “I believe he is truly trying to call attention to the fact that access to government-insured mortgage financing is becoming increasingly difficult for the consumer. Unfortunately, these credit score requirements are not an accurate requirement of any Fannie Mae, Freddie Mac or HUD insured lending program.”
Disclaimer: Every lending scenario is different. We have presented these insights for educational purposes, and to illustrate the challenges some borrowers face today. But this article should not be taken as gospel. The only way to know for sure if you’re qualified for a mortgage loan is to apply for one.