For those with credit issues,
preapproval is more important than a prequalification
By Erik J. Martin
Dreaming of buying a home but have less-than-perfect credit? Scoring that house you’ve been eyeing could possibly be easier than you expect — even with a relatively low FICO score. All it takes it getting your financial house and paperwork in order, which includes getting preapproved for a mortgage loan.
Consider that the average FICO score (which is the credit score most lenders scrutinize to evaluate your credit risk) for an approved mortgage dropped from 737 in July 2013 to 723 in April 2016, according to the latest data provided by Ellie Mae. In fact, in April a surprising 31 percent of home purchases and 56 percent of Federal Housing Administration (FHA) loans, respectively, had a FICO score between 600 and 699, per Ellie Mae. With many mortgage lenders typically preferring a FICO score of 720 and above, these latest numbers indicate that prospective borrowers with imperfect credit may have a better chance today of securing a mortgage loan than in recent years.
Arizona State University real estate professor Mark Stapp says that as competition for business from borrowers has picked up, more lenders have looked for ways to secure increasing demand for mortgages.
“There are many more non-bank lenders in the market today. Therefore, accepting lower scores is becoming more common,” Stapp says.
Randi Krasnoff, senior mortgage consultant with The American Eagle Mortgage Co. in Atlanta, says most of the credit scores she sees nowadays from loan applicants are closer to 640.
“The good news is that government-backed loans allow for less-than-perfect credit scores,” Krasnoff says.
In fact, a credit score as low as 580 can qualify for the FHA’s 3.5 percent down payment loan, and the U.S. Department of Veterans Affairs’ (VA) no-down-payment loan, which provides up to 100 percent financing for qualified veterans, requires a minimum credit score of only 580. Meanwhile, Fannie Mae’s HomeReady 3 percent down payment mortgage requires a minimum credit score of only 620, and Freddie Mac’s Home Possible Advantage loan offers 97-percent loan-to-value financing with only a minimum 660 credit score required.
If you have a below-average credit score, however, it’s especially important to get preapproved, which is different than a prequalification. The latter is based upon a credit review plus verbal information provided from a potential borrower to a loan officer. The former is given when the borrower submits income and asset documents to the loan officer, which are analyzed carefully.
“Prequalification is a conversation with a lender that doesn’t hold much weight when trying to make an offer on a home,” says Staci Titsworth, regional manager for PNC Mortgage in Pittsburgh. “Preapproval is a formal credit approval from an underwriter where the file has been supported by income, credit and asset documentation. Sellers and Realtors want to see that the customer has been preapproved before taking a home off the market.”
Here are five reasons why you should get preapproved if you have a below-average credit score:
- You’ll have better peace of mind:
Preapproval puts you on a fast track toward securing the mortgage loan you need. “Uncertainty is stressful, and preapproval helps resolve uncertainty,” Stapp says.
- The seller will have better peace of mind:
Your lender can issue a preapproval letter that you can present to a seller to indicate that you are a worthy candidate to purchase a home.
- You might get a leg up on the competition:
If you are bidding on a home against someone who hasn’t been preapproved, you could have an advantage.
- You can make a more informed buying decision:
“Preapproval helps a buyer to budget and understand how much of their income will go to the house payment and other debt obligations,” Titsworth says. “This helps them in advance so they don’t fall in love with a home they potentially cannot afford.”
- You can correct deficiencies quicker:
“If you have blemishes on your credit, the preapproval process helps you identify and resolve them,” Stapp says.
To improve your chances of getting preapproved and securing a mortgage, be prepared to go the extra mile.
“You have to pay your bills on time, clean up any old delinquencies or erroneously reported credit information listed on your credit report, work to obtain new fresh credit and pay off your account balances every month. This is what shows a lender that you are creditworthy and can manage your debt properly,” says Ed Hoffman, president of Moreno Valley, California-based Wholesale Capital Corporation. “Also, you need to consult with a knowledgeable mortgage professional long before you plan on buying. This person can go over your existing credit with you and give insight as to how to improve your scores.”
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