Monday, October 13, 2008

Which Credit Score Is Used?

Q: Is the borrower's or the co-borrower's credit score used to approve a loan?

A: If the loan is a Fannie Mae, Freddie Mac, FHA, or VA loan (this is the majority of loans at the moment), the lower of the two credit scores is used for qualification. This is why it is sometimes a good idea to take someone off the loan application. For example, if a couple is applying for a loan and one of them has a much lower score than the other, it may be better to only have the spouse with the higher score apply for the loan. Of course, if we do this, then the income from the spouse who is not applying for the loan cannot be used.

If the loan is a VA or FHA loan, it doesn't matter quite as much what the scores are because scores are not considered with government loans, although the applicant's credit history certainly is.

For loans that are not being sold to Fannie Mae, Freddie Mac, VA, or FHA, it is up to the lender which score to use. This is one of the reasons there are so many foreclosures. Lenders ignored poor credit scores, but still counted the income of the borrowers with those poor scores to qualify them for the loan. If someone has a history of not paying their bills, putting their name on a mortgage does not make them suddenly start paying their bills.

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