Starting Nov. 15, Fannie Mae is eliminating its 620 minimum middle credit score requirement for purchase and refinance home loan credit decisions.
Fannie is following Freddie Mac’s lead from several years ago when it eliminated a minimum required middle credit score for loan approval.
How does this help buyers? A 1-point difference in credit score — say 619 to 620 — is enough to keep a borrower out of contention for a loan or unable to enter the Fannie Mae process. So, this is good news for those who might be on the credit bubble with a low FICO score but have strong income and cash reserves. It doesn’t automatically rule them out.
Desktop Underwriter is Fannie Mae’s proprietary underwriting engine — the system that no longer requires a minimum third-party credit score, according to its updated underwriting bulletin.
DU does not use credit scores to assess credit risk. It will use its own credit risk assessment to determine a minimum credit risk threshold when evaluating a loan’s eligibility for sale to Fannie Mae.
It’s important to note that mortgage giants Fannie Mae and Freddie Mac do not fund mortgages directly. Rather, they purchase closed loans from mortgage lenders who run the borrower information through DU and Freddie Mac’s Loan Product Advisor or LPA, receiving an “approve eligible” or “accept/eligible,” respectively.
Before Nov. 15, Fannie used a minimum credit score to determine whether a borrower was eligible for a credit risk assessment. Fannie is replacing that requirement because it does not affect its ability to assess credit risk.
FICO scores range from 300 to 850, broken down into five categories: poor (300-579), fair (580-669), good (670-739), very good (740-799), and exceptional (800-850).
A newcomer to the mortgage ecosystem is VantageScore, which will soon offer another choice for mortgage lenders to use for credit scoring in addition to FICO scoring.
VantageScore credit scores also range from 300 to 850, broken down into four categories: Subprime (300-600), near prime (601-660), prime (661-780), and superprime (781-850)
Does this mean folks with credit scores under 620 will now receive loan approvals? Not necessarily. There is a lot more that goes into a credit decision.
According to Fannie’s bulletin, risk evaluation in mortgage underwriting must account for a broad set of factors, such as the borrower’s (cash) reserves, debt levels, the property’s characteristics, and loan purpose (purchase, refinance, cash-out refinance, owner-occupied or non-owner-occupied).
DU risk recommendations will not change based on the third-party credit scores that lenders may use.
Don’t expect to skip paying for credit reports in your homebuying process. Loans sold to Fannie Mae must continue to include the third-party credit scores. It’s either paid for by the borrower or sometimes by lenders or mortgage originators.
What about mortgages with less than 20% down requiring private mortgage insurance or PMI? PMI companies had previously not gone lower than a 620 middle FICO credit score.
Effective Nov. 16, private mortgage insurer MGIC is going to accept middle FICO credit scores as low as 600.
Blended scores are also in play. Normally, it’s the lowest middle FICO score of all borrowers. But you can average the scores to stay at 600 or above.
For example, let’s say one borrower has a middle FICO score of 620 and the co-borrower has a 580 middle FICO score. You can average the two scores which come out to 600. So, if DU provides an “approve eligible” (even though one borrower is under 600), then this will work in respect to getting a PMI insurance approval.
“Whenever we update our guidelines, we evaluate a range of factors that matter to both our lender partners and borrowers,” said Sal Miosi, president and chief operating officer at MGIC. “Our goal is always to balance risk responsibly while supporting sustainable paths to fulfilling the dream of homeownership for buyers who don’t have large down payments.”
It’s unclear if other PMI companies are going to follow MGIC’s lead, based on a response from a U.S. Mortgage Insurers spokesperson’s response. USMI is the trade association for the seven major PMI firms in the nation.
Do we really need credit scores at all if Fannie Mae’s DU and Freddie Mac’s LPA systems don’t rely on scores when it comes to a credit decision anyway?
Back in the olden days, say 30 plus years ago, pre-FICO scores, we largely approved and priced from a combination of a loan-to-value grid and a maximum number of derogatory credit items.
For example, 20% down was 80% loan-to-value on the grid.
In those days we used a grade system that went from A to D. The A indicated the applicant had zero 30-day late payments on their credit report, for example. Grade B might be a maximum of two 30-day late payments or one at 60-days late.
Since credit scores add more expenses, and maybe unnecessary expenses to the home approval process, it will be interesting to see how much these credit reports are used when Fannie and Freddie’s systems don’t rely on them anymore. The only reason scoring is being used these days is for risk levels (better pricing or worse pricing) of approved loans.
Next week: Comparing and contrasting FICO and its soon-to-come mortgage industry competitor VantageScore.
Freddie Mac rate news
The 30-year fixed rate averaged 6.22%, 5 basis points higher than last week. The 15-year fixed rate averaged 5.5%, 9 basis points higher than last week.
The Mortgage Bankers Association reported a 1.9% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $302 more than this week’s payment of $4,950.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: A 30-year FHA at 5.375%, a 15-year conventional at 5.25%, a 30-year conventional at 5.875%, a 15-year conventional high balance at 5.75% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high balance conventional at 6.125% and a jumbo 30-year -fixed at 6.125%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.5% with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.
