When you apply for a mortgage, you always hear the term, “good credit” being thrown around. But what exactly is good credit? Is there a matrix that you can compare your situation to in order to see how you stack up? How do lenders decide who has “good credit” and who has “bad credit”?
Generally speaking, good credit is a score over 700 – that’s a high number. You will not find a lot of people that have that credit score. Sure, there are some, but the average consumer does not have that score. To make matters even more complicated, to qualify as having “excellent credit” you need a credit score over 750 – that is even harder to obtain, especially as many people are still trying to overcome the devastation of the housing crisis and the economic downturn. These numbers are very general in nature, however. You do not have to have a specific credit score in order to have good credit any longer – there are ways to demonstrate responsibility without having a score that speaks for itself.
Bad credit, just like good credit, does have its parameters. In general, scores between 650 and 700 are considered “fair” by lenders. Poor credit is a score between 649-600 and anything below 600 is “bad.” But again, to whose discretion is the definition of bad credit coming from? When you apply for a mortgage, unless you show you need manual underwriting, your file will be sent through automated underwriting. This means a computer is determining your ability to have a mortgage. There is no reasoning with it; it either says yes or no. So those “bad credit” numbers suddenly became less subjective.
If you know you have bad credit because your credit history is marred with collections, foreclosures, and bankruptcies, then that is a different story. The only thing that will work with a credit history like that is time. As the months and years pass and you start to make your payments on time and at least two to three years is between your foreclosure/bankruptcy and now, then you have a better chance at getting a mortgage. You cannot undo your poor credit decisions, whether they were within your control or not, but you can control how you handle your finances moving forward.
Determining your Ability to get a Mortgage
So how do you know when your credit score is too low to get a mortgage? Common sense will help you decide what is right and wrong right now. If you have a low credit score, no assets, low income, and a lot of expenses, it is fairly obvious that you will not be able to get approved. On the other hand, if you have a low credit score, but you have good income, a steady job, and plenty of assets, you might not be turned down for a mortgage like you think you would. Your credit score does not say everything about you. For example, sometimes a person has insufficient credit because they do not use credit cards regularly. If you are not regularly charging things, your credit score might be lower because you have no utilization rate and a small payment history. There is nothing for the credit bureaus to rate you on – this does not mean you are a bad credit risk, it just means that your credit profile does not signify who you are as a credit risk.
So how do you get a mortgage if this is the case for you? It takes applying for different programs to find out. There are many different types of mortgages available out there, some of which are more lenient than others when it comes to credit scores, debt ratios, and levels of reserves. If you apply for a conventional loan, yet you get denied because of your “poor credit,” apply for an FHA loan. You might find that the FHA lenders are able to get you approved because of the lower requirements they have. Your credit score might not be as pertinent to those lenders as they can look at your history itself and see that you do not use your credit very often. If you can prove that you are financially responsible in other ways, such as having a large amount of reserves on hand, you may get qualified.
Mortgages are Difficult to Decipher
In the end, there is no open and shut case when it comes to getting a mortgage. The person you would think would be a “shoe-in” for a mortgage may get denied, while the person with mediocre credit that looks like a financial mess may get the approval he wants. It depends on the program you apply for and the compensating factors you provide the lender. If you plan on getting a mortgage in the near future, start planning now. If you know your debt ratio is high because you have a lot of outstanding expenses, start getting them paid down. If you do not have a lot of reserves on hand, start saving. These little things can help your low credit score not be a deterring factor when you try to get a mortgage.
There is no book that says what the perfect credit score is or what the perfect mortgage applicant looks like. Every lender takes different risks and looks at credit scores and debt ratios differently. What one lender thinks is a huge risk, another might not think is so bad. Before you give up and think you will never get a mortgage because your credit score is too low, just keep trying. If you truly cannot get approved for any type of mortgage, change things around a little bit and wait a few months before trying again. Eventually, someone will be willing to take your situation, but until then, just keep working on getting your credit scores higher by making your payments on time and continually using your available credit to show your worthiness to lenders.