As a prospective mortgage borrower, you might be baffled by the variety of responses you get from different lenders. If your credit score is less than stellar, it may fall into a gray area known as fair credit, depending on who you talk to. Credit scores in the low- to mid-600 range can fall into the fair category, yielding higher interest rates, higher down payment requirements and even a few rejections from the strictest lenders.
Mortgage Lenders Prefer FICO Scores
The term fair credit is a moving target. It can change depending on market conditions, lender and loan program. Fair credit is less desirable than good credit because it carries a higher risk of default; therefore, the cost difference between a mortgage with a 620 credit score and a 760 score can be thousands of dollars per year. Mortgage lenders typically rely on your FICO score, a number between 300 and 850, generated by the three credit reporting agencies: Equifax, Experian and TransUnion. Lenders base the interest rate and loan eligibility on the middle of these three scores.
The Government Caters to the Credit Challenged
Borrowers with poor and fair credit are good candidates for government-backed mortgages, such as Federal Housing Administration, Veterans Affairs and Department of Agriculture loans. These programs come with a government guarantee that allows the lender to be reimbursed if borrowers default. The FHA requires 3.5 percent down for fair credit -- down to 580 -- and 10 percent down for borrowers with poor credit -- between 500 and 579. Lenders often apply their own credit standards to these government programs, making it harder to get a loan if you have bad-to-fair credit. For example, most FHA lenders require a 620 or 640 score regardless of the down payment. VA and USDA lenders often need a 640 score.
Other Lenders Can Help
Mortgage brokers, banks and credit unions may offer proprietary loan programs for borrowers with fair credit. Brokers act as liaisons between borrower and mortgage companies and can search for your loan options among numerous lenders. Well known banks and smaller credit unions also may offer loans. Their standards may not be as flexible in other areas, though, and you may find yourself paying a higher-than-market interest rate in exchange. That's because many banks and credit unions keep loans on their own books, or portfolios, and bear the risk for the life of the loan.
Fair Credit Is Hard to Pin Down
You have fair credit if your middle FICO score is 601 to 660, according to Credit.com. However, fair credit is anywhere between 650 and 699, according to Bankrate. Credit thresholds rise and fall as market conditions change. A mortgage lender looking to extend credit to more borrowers as housing values and the economy improve may be willing to take on riskier buyers. Lenders may make up for the increased risk by increasing interest rates for those marginal borrowers.
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