We have been crushing the dreams of homebuyers all week…
And – it’s not because we want to or because we’re doing something wrong.
It is solely because we are telling them the truth: Fannie Mae’s removal of its 620 minimum credit score requirement will not help about 98% of borrowers with scores under 620.
Fannie Mae used to have a hard-and-fast cutoff for borrowers with credit scores under 620, but they recently announced that they will no longer have a minimum score starting November 15th.
Our borrowers with credit scores under 620 saw this news and contacted us to get their new Fannie Mae loan approval…but the new rule will help none of them.
A few things…
- Removing the minimum will only help borrowers with strong compensating factors: (1) high income/low debt ratios; (2) large down payment/low LTV; and/or (3) significant reserves in the form of “liquid assets.”
- Lenders could already get around the 620 minimum score – by adding a co-borrower with a high credit score.
- Late payments and collection accounts kill deals even if there are compensation factors. This is something lenders struggle to overcome, even with compensating factors. So, if a credit score is low because of recent late payments or collections, Fannie’s new rule will not help.
- The Loan Level Pricing Adjustment (LLPA) will be deadly! LLPAs are the extra fees Fannie charges for higher loan-to-value ratios and lower credit scores. Fannie already charges substantially higher fees and rates for borrowers with scores under 640 (rates can easily be 1% higher), so I shudder to think what the sub-620 rates will look like for borrowers putting down 25% or less.
- Borrowers with low credit scores are often much better off with FHA financing. FHA offers lower rates than Fannie Mae; FHA is not nearly as punitive when it comes to low credit scores; FHA allows for higher debt ratios; and FHA allows for a 3.5% down payment no matter what.
The borrowers who have been seeing Fannie’s announcement and calling us all have low down payments and too few compensating factors to benefit from the elimination of the 620 minimum score.
So no, it’s not time to celebrate because this will help so few borrowers.
