Mortgage Loan with a 500 Credit Score? It's Possible!

By
Real Estate Agent with Homebuyer Representation, Inc. DRE# 5467433

A new day in credit lendingAccording to a number of Wells Fargo Home Mortgage originators, Wells Fargo will now allow an FHA borrower to get a mortgage with a credit score of less than 600.

In exchange for a larger down payment and a lower overall debt load (lower Debt-To-Income ratios), Wells Fargo Home Mortgage currently allows borrowers to take out an FHA loan on a purchase transaction with a minimum credit score as low as 500.

Here are the details as I understand them:

The credit policy change was posted to Wells Fargo Home Mortgage originators on January 14, 2011 and takes effect for purchase transactions using an FHA loan on or after January 15. The new policy will allow minimum loan scores and loan to value ratios as follows:

  • A score of < 500 = not allowed
  • 500 to 579 = 10% minimum down payment (90% Max LTV) PLUS "additional requirements"
  • 580 to 599 = 5% minimum down payment (95% Max LTV) PLUS "additional requirements"
  • 600+ = 3.5% minimum down payment

The "additional requirements" for all borrowers with FICO scores < 600 are:

  1. Lower Debt to Income Ratios. These could be as low as 31% for housing debt and 36% for TOTAL debt.
  2. 2 full months of "reserves" are required (cash in their bank account AFTER paying down payment and closing costs). The reserves are calculated on the total housing payment, in other words Principal, Interest, Taxes and Insurance (PITI)
  3. Seller contributions may not exceed 3% of the purchase price
  4. Gift funds are not allowed to count toward the down payment requirement (for any borrower with a score less than 600)
  5. Downpayment Assistance Programs are not allowed to count toward the down payment requirement (for any borrower with a score less than 600)

The borrower must also be able to document that they accumulated the required downpayment funds and that they did not come from a gift or from a DAP. They must prove they had the ability to accumulate the funds and documentation proving how they came to accumulate the funds needs to be included in the loan file.

A few final details:

  • This is for purchase transactions only.
  • This is only CURRENTLY available ONLY from a Wells Fargo Home Mortgage RETAIL lender.
  • Pricing adjustments will still be made to the rate. In other words, the lower the credit score, the higher the interest rate will be. You will not be offered the best rate with a low credit score.

What does this mean?

I take this to be a sign of a potential loosening of the credit market in the future. No, credit will still not be as freely available as it was a few years ago, nor should it be. (It shouldn't have been then!) But most analysts agree that almost all lenders went too far to the extreme with requirements putting a near complete freeze on mortgage lending.

A good number of people over the past few years have seen their credit scores slip for a variety of reasons. Some were at one point homeowners and would like to be again. There are borrowers still yet to default, there will still be short sales and foreclosures. With the tightened credit restrictions, buyers just haven't been plentiful enough to make decent headway against the excess inventory in many markets.

If other lenders follow suit, and we see additional lenders adopting similar policies related to easing requirements in one area (such as credit score), at the same time they will likely raise other requirements to compensate (such as down payment, Debt to Income Ratio, Reserves, etc) for the increased risk of default. Although it will take a while for the effects of these easing restrictions to really kick in and have a substantial effect on housing supply and demand (there are other demands that will require time and discipline to get in order), this is definitely a step in the right direction and it shows some responsibility and thinking by those underwriting such loans.

Our typical client has credit in the 700s and 800s and also usually has a substantial down payment, so the credit freeze has not directly affected the majority of our clients. But today's buyers will one day be sellers and their property values and equity positions will fare better as more people qualify to obtain credit and purchase real estate.

If you think you might have credit scores below 600 and are interested in buying a home, call or email and we can refer you to an agent and a lender who can help you out.

If your credit score is higher than 700 and you are interested in a buying a home within the next 90 days, call us today for a free consultation!

  • Are you or your company relocating to Utah?Homebuyer Representation, Inc. - Exclusive Buyer Agents
  • Are you buying a $300,000-$800,000 home within 90 days?
  • Do you have excellent credit?
  • Are you making a substantial down payment or paying cash for your home?

If so, You Deserve the Best!

Don't buy a home without an agent on YOUR side of the transaction!

Make sure you hire an Exclusive Buyer's real estate agents on the buyers sideAgent!

Call us at (801) 969-8989 or contact us via the link on this page.

©2011 Homebuyer Representation, Inc. - "The Real Estate Agents on the Buyer's Side" TM - Salt Lake City, UT - Exclusive Buyers Agents (EBA) - All Rights Reserved 

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Topic:
Lending / Financial
Location:
Utah Salt Lake County
Groups:
ABR-Accredited Buyer Representatives
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Tags:
mortgage
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500
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Comments 8 New Comment

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Rainmaker
1,076,428
John Pusa
Your All Time Realtor With Exceptional Service
Sellstate Pacific Realty

Benjamin - Thank you for the information on Wells Fargo loan program.

January 19, 2011 12:11 AM
Rainer
14,672
Darrell Catmull
Destiny Real Estate

Excellent work Ben, thanks for the details and keep us up to speed.

January 19, 2011 06:16 AM
Rainmaker
237,872
Benjamin Clark
Buyer's Agent - Certified Negotiation Expert
Homebuyer Representation, Inc.

Thank you all. I'm just getting back into regular blogging. I took a year off while serving as President of the National Association of Exclusive Buyer Agents. So glad to be back!

January 19, 2011 04:15 PM
Rainmaker
237,872
Benjamin Clark
Buyer's Agent - Certified Negotiation Expert
Homebuyer Representation, Inc.

More info on sub-600 FHA loans.

Sounds like a second lender is in on the mix:

From Ken Harney:

http://www.inman.com/buyers-sellers/columnists/kenharney/ficos-and-fha-2-big-lenders-loosen

 

January 31, 2011 06:43 PM
Rainer
157,544
Dave Sullivan
The Real Story on Your Credit Score - TheCreditGuy
www.TheCreditGuy.TV

Thanks for the information I think Credit Scoring will be with us for a long time.  check out a free website about credit scoring by a 20 + year FICO professional at www.thecreditguy.tv

January 24, 2012 09:25 AM
Anonymous
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Rainmaker
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Benjamin Clark

Buyer's Agent - Certified Negotiation Expert
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