It’s no surprise that mortgage lenders have gotten a lot more tight-fisted in the current credit meltdown. Still, rates are lower than they’ve been in years for those who can get a loan. So just how low can your credit score be to still get approved?
What is the minimum credit score you have to have to get a home mortgage?
— Art, Address withheld
While a credit score alone might have gotten you a home mortgage during the lending spree that got us all into this mess, you’ll have to provide quite a bit more information these days to get approved. Lenders are going to want to see a steady source of income and a list of your existing debts outstanding. Gone are the days when you could get a loan with no documentation that would consume 70 percent of your monthly income. Same for adjustable rate mortgages with low “teaser” rates or mortgages that let you pay only interest.
Your credit score, also called a FICO score, still matters. But it’s more likely it will determine how much you have to pay. The lowest rates are going to borrowers with the highest scores. Lenders are also paying more attention to down payments — the more you put down, the lower the rate you’ll qualify for. Borrowers with lower credit scores also have to pay more in upfront fees, known as “points,” to get approved. A point is equal to one percent of the loan amount.
Rates, fees and lending standards can also vary quite a bit from one part of the country to another, for obvious reasons. If you’re looking to borrow 95 percent of the purchase price of a home in an area where home prices are still falling rapidly, that’s a riskier loan than if you’re putting up 20 percent to buy a house in a more stable neighborhood. Higher risk means higher cost.
For first-time borrowers, many of the mortgages being written today are FHA loans, which let you put as little as 3 percent down. But there are caps on how much you can borrow. For most parts of the country the limit is $271,050. In a handful of the most expensive housing markets, the limit goes up to $625,500. You can look up the limit in your area here.
With all these factors in play, it’s hard to generalize about a “minimum” credit score. According to a recent rate sheet from a lender in Oregon, a borrower with an excellent score (740) can borrow that the going rate without paying points, even if the loan comes to 97 percent of the value of the house.
Moving down the rate sheet, borrowers with FICO scores of 660 or better can still avoid paying points — as long they borrow 60 percent of the value of the house or less. If you only have a 20 percent down payment and a 660 score, you’ll pay 2.5 points.
The lowest score on this lender’s rate sheet was 600, which would require a payment of 1 point if you’re borrowing 60 percent of the house value or less, rising to 3 points up for to 80 percent of the value (which means a 20 percent down payment.) With a 600 score, this lender won’t approve a loan with less than 20 percent down.
Borrowers who are buying investment properties can also expect to pay extra points. So can buyers of condos who put less than 25 percent down.
And the interest rate you pay for the loan — no matter what you credit score — will also determine how many points you to pay up front. This lender was offering a 30-year fixed rate mortgage for 4.5 percent if you’re willing to pay another 1.2 points.
These numbers are just an example of what’s out there. With hundreds of lenders each offering dozens of different loan programs, the only way you can find out whether you can get a loan, and what it will cost, is to shop around.
Mortgage rates — like everything else associated with credit these days — are extremely volatile. That’s why you may decide to ask the lender to “lock” your rate for 15 or 30 days so you’re guaranteed that monthly payment if rates go up before the approval paperwork is processed.
But keep in mind that rate lock may come with yet another fee attached to it.
Does my credit score drop when I check it through annualcreditreport.com each year?
— Jon W.Dayton, Ohio
No. Nor does your report reflect what are called “soft inquiries” from companies searching the credit databases for creditworthy customers to bombard with junks mail and spam.
The inquiries can hurt your score are those that come in when you apply for new credit. The reason is that an increase in the amount of credit you’re taking on could raise the ratio of your total debt to your ability to pay it off. Generally, if you make a number of inquiries all at once, and only apply for one new loan or credit card, the impact will be limited. The credit agencies are supposed to recognize that you’re shopping for credit — not going on a major borrowing spree.
Does my W4 need to match my husband's? If either of us checks "married” but withhold at higher “single” rate and end we end up filing together, will we be reimbursed the difference between what we would have paid if we'd checked off "married"?
— Natalie, New York, NY
The amount you’ll get back (or owe) when you file your taxes depends on your household's total wage earnings and other income, not the amounts withheld from your paycheck. The amount withheld based on your W4 is really just an estimate of what you'll owe at the end of the year.
Depending on your circumstances, it may not be a bad idea to sign on for that higher withholding rate, especially if you have income from other sources and haven’t set aside money to pay taxes on it. Investment income from interest and dividends falls into this category; taxes are usually not withheld from these payments. So by over withholding on wage income, you won’t be stuck with a big tax bill in April.
(Although for most people, investment income won’t be a problem this year.)
If you find that you’ve had too much withheld — and you’re due a refund — you might want to consider scaling back on your withholding by refiling your W4, no matter what the instructions say. By overpaying, you’re basically lending the government money interest-free all year – until you get it back with a refund check in May.
Just be sure not to underwithhold too much. The rule says you have to pay at least what you paid in taxes last year — or 90 percent of your final tax bill this year - or you'll owe interest and penalties for underpaying.
(Update: Thanks to an alert CPA for correcting the thresholds on unpayment when this column was first published.)