COVID-19 HAS thrown up a lot of financial roadblocks for Boston condo buyers that were serious about buying a Beacon Hill condo this year. Make no mistake about it, your credit score does make a difference in being able to qualify for a bank mortgage. Although it is possible (but difficult) to find private mortgages that will accept a low or no credit score, virtually every Boston real estate buyer will have their credit score scrutinized by the lender. That makes it difficult for people that the virus caused to become temporarily unemployed, fall behind on car and student loan payments, missed rent payments, and find their credit scores blemished for other reasons.
But not all is lost as long as you don’t give up trying to buy a downtown Boston real estate because you’ve come to believe some of the myths that swirl around how your credit score
The FICO credit score goes up to 850. Anything above 700 is considered a good score but the fact is that millions of people obtain mortgages with scores all of the ways down to 580. Your mother or father may have told you that you need a score above 700 but that is only to qualify for the lowest interest rates. According to Experian, “a score above 760 will qualify you for the best interest rates.” But the FHA will guarantee a mortgage for a credit score as low as 580 and only requires a down payment as low as 3.5% of the purchase price. In fact, the FHA allows credit scores as low as 500 but a higher down payment is required for anything below 580.
That is false. The fact is that a mere 1.2% of Americans have a perfect credit score of 850. Almost all of us have something less than perfect credit reports. The most damage is done from bankruptcy or previous foreclosure. Again, you want to look to the FHA for the most lenient requirements for negative events on your credit report. For Chapter 7 Bankruptcy, the waiting period is two years (individual lenders may require longer). Chapter 13 Bankruptcies are allowed after payments to creditors have been made and verified for at least one year. FHA insured mortgages generally require a waiting period of three years after a foreclosed or a deed-in-lieu of foreclosure. However, if the foreclosure was your primary residence with extenuating circumstances, an exception may be granted if you have again established good credit.
You need to be aware that individual lenders have requirements that can be different from FHA requirements. Although the FHA might be guaranteeing a lender’s loan, it’s possible and frequent for lenders to have requirements that are more stringent than the FHA. For instance, many lenders have a minimum credit score requirement of 620 for a loan that the FHA allows a score of 580. Shopping for a lender can find the ones allowing a score of 580. Different lenders will also offer you higher and lower interest rates along with many other options that you can choose from. According to the U.S. Consumer Financial Protection Bureau, “Within a 45-day window, multiple credit checks from mortgage lenders are recorded on your credit report as a single inquiry.”
That is wrong for several reasons. Although a higher income might qualify you for a larger mortgage, it is not supposed to affect how your credit score is calculated. Plenty of people with high incomes have low credit scores just as many lower-income people have good credit scores. Your credit score is a measure of how you manage your debt. It is not a measure of your income.
Busting these myths should give you the confidence to continue working towards purchasing a home even if you’ve had financial setbacks during COVID-19. Still, it’s always a good thing to take action to improve your score so that you’ll qualify for a more favorable interest rate and other desirable mortgage options. The article links below can help you make big improvements in your credit score: