Currently there is a lot of marketing in the home loan industry promoting buying a house with a 580 credit score. While it is possible to get approved for a mortgage with a 580 credit score, there are many benefits to applying for a loan after having a 620 credit score.
In a recent interview, Chuck Poulin, Branch manager of Inlanta mortgage says “a 580 can get you in the stadium to see the game, but its not the best seat in the house. Its like sitting far in the outfield behind a pole which obstructs your view. I work to get clients better seats in the game, by helping them understand the benefits of improving their credit situation. The benefit is much more apparent after the borrower is at 620”.
Poulin, a 21 year mortgage industry veteran and expert personality cohost on the real estate revealed radio show on Chicago’s Am 560 radio closes millions of dollars in loans per year and has seen the benefits of borrowers improving thier credit score first hand.
The interest rate offered for the borrowers loan is typically going to be higher with a 580-619
Easier underwriting Less turbulence in the closing process
While technically a loan can be approved and closed between 580-619, the underwriting is much more involved. Most files with that credit score range require a manual underwriting process. This difference in process is more involved, requires more documentation and additional review.
options tend to shrink under 620
While you can technically get approved at 580, it is typically not the competitive interest rate. Borrowers who have a score under 620 can experience higher interest rates than those over 620. There are also less loan programs available for those under 620 Also most down payment assistance programs are not available.
Requires more documentation and the process tends to be longer
Most loans under 620 tend to have a need to be manually underwritten. This is a different process of underwriting that tends to include the request for more documentation and extensive explanation about anything that the underwriter needs more clarification on. This variance in procedure for processing and underwriting the loan can take a longer time to close. This delay in closing can cause uncertainty and anxiety for the buyer, the seller, and all of the professionals involved in the transaction.
Red Flags can delay your ability to qualify regardless of the credit score
Regardless pf the credt score, the contents of the credit report also need to be taken into consideration. “Red Flags” on the credit report can be a “show stopper”, that delay the process of getting a loan. These red flags include Bankruptcy, short sale/ deed in lieu of foreclosure, foreclosure, chapter 7 or chapter 13 bankruptcy. Collections. The delay caused by these redflags can delay the ability to qualify for up to 7 years depending on which red flag it is. (Please check with your lender or agency guidelines for most up to date rules regarding this issue.) Many of these issues are a big factor that are bringing the score below 620. Since these need to resolved prior to getting a loan, the resolution of the issues will most likely have a positive impact on the credit score which is very likely to boost the borrowers score to 620+once the issues are resolved.
Many lenders market the 580 credit score programs as an option because technically it is an “option.” However in my experience it has been more so a motivator to get the applicants to get motivated to do a transaction. Many times these applicants resolve the credit issues they have prior to officially applying and end up being over 620 anyways. Never say never because there are some situations where people get approved for loans with a 580 score, but many borrowers have an easier time getting approved with more favorable terms and options once they raise the credit score over 620.
– Tom Mackrola