Just because we can do an FHA loan at 580 FICO, does that mean we should? By: Jason Hillard

this post was originally published on home loan ninjas on July 2nd 2010

Perhaps the biggest advantage to being an affiliate branch of a mortgage bank is our inherently “hybrid” nature. We are the bank; we have more responsibility and control than ever before. However, there are some hard and fast guidelines that all loans we originate and underwrite “in-house” must adhere to. These are policies that ensure our good standing with the investors we sell the loans to. Without access to these investors, we wouldn’t be in business because we do not service loans.

One of these steadfast rules is a minimum FICO score of 640, regardless of the loan program. This is where the “hybrid” nature of our operation kicks in and really sets us apart from a traditional bank. If we have clients that don’t meet certain underwriting criteria as prescribed by our investors, we can broker the loan to another bank. Hybrid: part bank, part broker. It really is a beautiful thing because it allows us to assist more customers than before. And we can be faster on our feet because we aren’t always relying on third parties, and provides more options to the consumer.

A quick perusal of the matrix of banks we are brokered with yielded a surprising tidbit of information: we can still do an FHA loan down to a 580 credit score.

This, of course, brings up an important question…

Just because we can, does that mean we should?

My partner and I, as I have previously mentioned, rarely fill out a client’s home loan application the first time we talk to them. Many people out there don’t qualify for their “ideal” mortgage right away. Others don’t know how much income they truly make. The point is, we get to know the down and dirty details before we begin the process in earnest. Outside of a few exceptions, this is the only responsible way to do business.

Now many times one of those details is a “less than perfect” credit score. Frequently, this can be remedied in 6 to 12 months with a little hard work, diligence, and a willingness to pay the items that are negatively impacting the client’s credit score.

We help people climb back up. Its what we are supposed to do. We are advisors, not just salesmen.

Can you make a case in the post-bubble (fingers-crossed) era for doing loans for people with a 580 credit score?

Right now, we have quite a few clients that are in this range. Actually, we always do because we talk to a lot of people and we don’t believe in simply turning people down with no plan to become “approvable”.

So how do we determine whether or not to proceed?

The answer, to me, lies in whether or not the consumer is climbing the stairs up, or riding the slide down.


Let’s say we had a client come in to review their credit history with us 6 months ago, and at that time, their score was 493. We highlighted a plan of action, and they set their minds to achieving those goals. Let’s now assume that client followed all the steps and now they have a 597 credit score. They mention that they saw a house for sale over the weekend that they absolutely fell in love with. They want to know if they can get approved to purchase the home. I am morally OK with my Originator beginning the process with them. They have worked hard to improve their situation, and want to take an advantage of the opportunity to buy a house they really want, rather than settling for something now and trying to upgrade later.

Now let’s look at another situation that isn’t uncommon. A borrower comes to my mortgage company to get pre-approved to buy a “to be determined” property. They have a 641 credit score at the time of application. They start house-hunting, but can’t find anything they want for 60 days. Then they find something, put an offer in, and the offer is rejected. They put an offer in on another house; this one’s a short sale. They go back and forth with the seller over the next few weeks about closing cost concessions and inspection addendums. Suddenly the credit report is over 90 days old, which means we have to pull a new one. Low and behold, the borrower has maxed out a credit card, or taken a new loan out and missed a payment. Their credit score has dropped to a 599. Should we go ahead with the home loan?

The answer is not so clear cut, but I am damn certain about this: we are not acting in the consumer’s best interest if we don’t at least review the situation with them and determine the delinquency’s validity. It’s not professional to negotiate a mortgage for someone who is on the slippery slope of credit decline.

We aren’t trying to be “negative”, just honest and professional. The collective irresponsibility of borrowers, brokers, lenders, and banks got us into the current mess, and professional responsibility is the only way to prevent a repeat.

question mark image credit  Image: jscreationzs / FreeDigitalPhotos.net

slide image credit Image: Tina Phillips / FreeDigitalPhotos.net

How $257 can halt a home purchase

My company frequently works with customers to “clean up” their credit so that they can qualify for a home loan. This process typically takes about 6 months, maybe longer depending on the severity of the problem and the resources available to pay off delinquent accounts. We don’t charge anything for this because: a) it’s illegal, and b) it’s part of serving our clients and ensuring they get a loan they can live with.

We have been working with one couple on this process for about 8 months, and we were able to get them approved to buy a home. We all know that corrections/updates to credit tradelines can take somewhere between 30-90 days to be reflected on your credit report. However, this isn’t always the case. Sometimes the delinquent items continue to reported inaccurately for years. In my experience, in no instance is this more true than with government judgments and tax liens.

We’ve all heard horror stories about government inefficiencies from every department in every level of government. Whether it’s the DMV or the USPS, it’s a big undertaking and people are, after all, only human. There will be mistakes. However, the lack of accountability is an area in which I think the public sector excels.

When we re-pulled the credit to get the loan going, the client’s FICO score was just fine. However, a $257 judgment from Multnomah County, OR was still reporting as delinquent. A couple of years ago, the county instituted a temporary income tax called the ITAX, and many people wound up owing hundreds, sometimes thousands of dollars when the tax expired. Our clients were some of those people.

The client had paid a settlement with the county a couple years ago, and believed that this amount was included. Even if it wasn’t, $257 isn’t a huge deal for anyone to worry about. Until you start adding penalties and 9% interest, that is.

We decided that we would submit the loan file anyway, and given underwriting turntimes, we would be able to collect proof before every other piece of documentation had been signed off by our underwriter. What follows is the story of how that happened.

I called the county circuit court, where the judgment had been filed and processed. I was given another number to call. The person at that number couldn’t help me, because it was a “small claims” matter. She gave me the number for small claims. The nice man at small claims told me that he could accept a payment for the judgment, but has no way of knowing what the payoff amount would be. I played along hoping he could give me the number of someone who would know more about the issue. He directed me to yet another phone number, which was the “helpline” for the ITAX. I called this number. It was out of service, as it expired THE SAME YEAR THE ITAX EXPIRED, which was a few years ago. A pre-recorded message directed me to yet another number. The person I talked to at that number told me that the account had been sent to collections, and gave me the number of the collection agency they contract with.

OK, now I’m getting somewhere. I skeptically call the collection agency, and a very helpful lady answered the phone and told me what I already suspected:

They would never sue someone over $257 because it costs $100 to file the suit.

This is where her very nice qualities shined through. She took down my information, and said she would call the county courthouse to find out what was going on and get back to me. I thought to myself, “why the heck would she take the time to do all that for something she has no prayer of receiving payment on?”. However, I thanked her and moved on.

I called the county back, explaining yet another person what I had just been through, and she directed me to the one man who still deals with ITAX payment issues. She also asked to remain on the line to verify that this would be the correct way to deal with any other future ITAX related issues so that people like me would not have to waste what had become a 45 minute telephonic wild goose chase. I thanked her profusely.

The “ITAX man” picked up the phone and was very courteous and professional. However, he told me something after looking up the client in his system that absolutely floored me. He said that the client’s judgment amount was for $833! I told him they had another tax lien from a previous year that had already been paid off, as indicated on my credit report. He said he didn’t have any record of that, but that he would take my word for it because that’s what the credit report said. He said that the client would need to send his department a check for the $257, and he would send the check and the paperwork to the attorney’s office. The attorney would clear the item, then send the check in to be processed. Once the check had cleared, I would get an email with the proof of payment on county letterhead. I hesitantly asked him how long he thought this process would take. He said 5 or 6 business days.

I knew the client would pay the $257 just to get it over and done with, and feeling like I had accomplished a small victory, we called him. He told us that he had just made 5 phone calls to various county departments and that they told him that their records indicated that he didn’t owe anything, which is what we suspected all along. However, he would need to get a letter from the law firm he settled with indicating as such so that we could prove to the lender that everything was all clear. That is where we are in the process.

Now, everyone I talked to during this entire process was courteous and helpful. But here’s what I want to know:

How can a society function when it takes roughly 23 phone calls to clear up a $257 judgment that NOBODY can even determine is still active?

It would be a shame if something like this caused this client to miss out on the opportunity to buy the house of their dreams at a record low interest rate. Surely, we can do better.

Jason Hillard