A couple of weeks ago Fannie Mae announced they would be removing the long standing 620 minimum credit score requirement, with some caveats. This would open to the door to borrowers with credit scores less than 600 to qualify for a conventional loan on purchases and refinances.
Originally I was skeptical how many lenders would allow lower credit scores since the agencies allow “overlays”, in other words having more restrictive criteria than is required. Now that it’s been a few weeks and the policy is beginning to be implemented, I am pleasantly surprised. We have a few investors allowing credit scores into the 500’s provided the automated underwriting system provides a loan approval. There is only a slight penalty to rate for the lower credit score. After comparing conventional terms to FHA here are a couple of differences:
Purchasing with less than 20% down:
Conventional loans have Private Mortgage Insurance companies, and the mortgage insurance rates are set by each company based on credit score, down payment, and other factors. FHA loans are insured by the Federal Housing Administration which provides uniformity with mortgage insurance rates. In cases with lower credit scores the Private Mortgage Insurance companies premiums are higher than FHA’s, making the FHA loan a more cost effective versus it’s conventional counterpart.
Purchases with more than 20% down:
Mortgage insurance is not required when the down payment is 20% down or greater on conventional mortgages. FHA requires mortgage insurance regardless of the down payment. Conventional loans are the clear winner from a cost perspective. The same applies when refinancing a property when you owe less than 80% of the market value.
Coming Soon: 2022 Loan Limits to be Announced
The national conforming loan limit has already been announced as $625,000. We should receive news soon on the High Balance loan limit that is applicable to High Cost Counties.