Notes on credit scores

guest commentary by Ethan Nobles, director of media relations, Arkansas Realtors Association

With all the talk about the importance of credit scores these days, one might be compelled to believe that it’s difficult to take out a mortgage without a spotless credit history.

That’s not the case at all. While it’s true that banks are looking closer at credit scores and are diligent about verifying the incomes of people looking for mortgages, the investors backing Federal Housing Administration (FHA) loans require a minimum Fair Isaac Corporation (FICO) credit score of 620.

The FICO score, of course, is the standard used by lenders in determining whether to extend credit to an applicant. The good news here is that a FICO score of 620 is indicative of a credit score that is fair-to-middling. Someone with a FICO score of 620 will have a few negative issues in a credit history.

That is surprising, of course, because the myth is that lenders are looking for almost spotless credit before they’ll extend a mortgage. Of course, whether someone with a FICO score of 620 can get a loan from a particular bank is another matter – some investors won’t agree to back a loan unless the score is higher.

However, there are banks that will approve an FHA loan for people with a fair-to-middling credit score. Someone rejected by one bank might find another that will write a mortgage. The best thing to do is to shop around if a FICO score is in that 620 range.

It is important to note that the FHA does not suggest a minimum credit score. Investors set their own guidelines.

More good news for people interested in an FHA loan is that most homes in Arkansas fall well under the maximum amount for which an FHA mortgage will be insured. One of the primary differences between an FHA mortgage and a conventional one is the down payment.

Arkansas mortgage bankers have confirmed that down payments are very important these days. Most lenders writing conventional mortgages require a down payment of around 5%, but most FHA mortgages can be had for around 3.5% of the value of the home to cover a down payment and the fees and costs associated with the loan.

If you’re talking about a home that costs $250,000, the lower rate could mean the difference of about $3,750 – the down payment for a conventional mortgage in that scenario would come to $12,500, whereas the down payment plus costs on an FHA loan would be $8,750.

On top of all of that, there is an $8,000 tax credit for first-time homebuyers from the federal government. Under IRS guidelines, a first-time homebuyer is defined as someone who has not owned a primary residence for three years.

That homebuyer, in our scenario, would receive all but $750 of that $8,750 down payment back in the form of a check. When one considers mortgage interest rates that are hovering around 5%, it does appear there are a lot of advantages now for someone wanting to purchase a house.

At the Arkansas Realtors Association, we certainly hope there are plenty of incentives for people to purchase homes. One of the things that will get the economy moving again is a healthy housing market, so hearing of new incentives for people to purchase homes is always good news.

Contact Ethan Nobles at [email protected]