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Fannie Raises Minimum Credit Score, Big Down Payments May Not Count

By Sally Maison
Published: Wednesday, December 23rd, 2009

Five years ago, mortgage applicants who go to banks with a 20 percent down payment will get their loans approved the moment they walk in. However, now that every creditor is tightening everything, a big down payment can no longer merit a mortgage loan approval.

Fannie Raises Minimum Credit Score, Big Down Payments May Not CountThis week, Federal Mortgage Financer, Fannie Mae, will start requiring mortgage applicants to have a credit score of at least 620, along with a 20 percent down payment in their pockets. The previous cutoff was 580.

Fannie Mae’s guidelines are considered by mortgage lenders as the gold standards since it is an important source of financing for creditors. Consequently, banks are expected to raise their credit score standards as well.

Economist Bob Walters, said credit ratings did not matter as much as they do now. He also noted other changes that would make loan qualification for Fannie Mae even more difficult.

Even if loan applicants meet their required credit score and down payment; their loans will not be secured by Fannie if they spend more than 45 percent of their monthly income in debt payments. Fannie Mae Spokesman, Brian Faith, did not reveal the previous limit but said it is higher than 45 percent.  Finance specialist, Gerri Detweiler, said the stricter standards could frustrate potential homebuyers who are hurrying to take advantage of depressed home prices, low interest rates, and the $8,000 federal tax cut which was extended until spring next year.

Experts say consumers who have already chosen the home they want to buy may not be able to do much in improving their credit rating. However, those who are still looking can still improve their credit score and overall profile.

One of the best ways to boost a score, experts suggest, is by reviewing a credit report and making sure it is free from errors. Consumers are advised to pull out their reports from Equifax, Experian, and TransUnion to make sure they are free from inaccuracies and fraudulent accounts. FICO spokesperson, Craig Watts, said consumers must not hesitate in filing a dispute since the bureaus are willing to work with them in correcting errors.

Watts also advise consumers to avoid opening new accounts months before making their mortgage application. He explained that newly opened accounts will most likely hurt their credit score.  Additionally, potential homebuyers are advised to reduce their credit utilization ratio to boost their credit rating. This can be done by paying off card and other debts.

After months of serious efforts in improving their credit rating, consumers are advised to check their score to know how well they are doing.

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