A new credit score rule from Fannie Mae will help co-borrowers qualify if one has a good credit score and the other does not. Here's what you need to know.
Fannie Mae is rolling out new rules that let co-borrowers who are buying or refinancing a home together average their credit scores.
In a major shift from previous standards, the agency will deem applicants eligible even with credit scores below the 620 minimum, as long as they have a higher-credit co-borrower to compensate.
The rule, which goes into effect on September 18, 2021, could open up homeownership opportunities for anyone buying a home together, especially when one has great credit and the other doesn't.
According to Fannie Mae, the minimum credit score to qualify for one of its loans is 620.
In the past, the agency told lenders that it must use the lowest score of any borrower to meet that minimum. So, for instance, if you are buying a house when one spouse has bad credit, it can be a problem. Two co-borrowers with scores of 720 and 610 were not eligible to buy or refinance a home together.
Under new rules, the lender can average the two scores together for eligibility purposes. In this case, the average score would be 665, raising the couple's average above the 620 minimum.
Here's how it would work. Lenders use the borrowers' "middle score" based on the three scores they receive from credit bureaus. In the below scenario, the lender can use the average of the two middle scores instead of the lower one to determine eligibility for a Fannie Mae conventional loan.
| Score 1 | Score 2 | Score 3 | |
|---|---|---|---|
| Borrower 1 | 605 | 610 (middle score) | 623 |
| Borrower 2 | 680 | 720 (middle score) | 727 |
| Eligibility score | 665 |
The average would bump this borrower pair from "ineligible" to "eligible."
One important note is that the "average middle score" will only be used to tell the lender if you meet the 620 minimum credit score requirement to be considered for the loan.
The higher average score itself will not help you be approved for the loan. Fannie Mae will still use the lowest middle score of any borrower on the loan to make an approved/not approved decision. That being said, Fannie Mae states that "credit scores are not an integral part of DU's risk assessment," DU being its underwriting algorithm.
But the new rule does give sub-620-score applicants a chance at approval, something that was not the case before.
Additionally, the lender won't give you a better interest rate based on the higher average score. Neither will mortgage insurance be cheaper. This new rule is specifically for eligibility, i.e. to be considered for the loan.
In many cases, co-borrowers have vastly different credit profiles. One may have made mistakes in the past while the other has pristine credit.
Under old rules, it didn't matter how high the perfect borrower's credit score was. The lender still used their co-borrower's score to determine eligibility.
There is one common solution: remove the low-credit borrower from the loan.
The high-credit borrower would have to qualify using their salary alone. With high real estate prices in many areas of the U.S., it's difficult to be approved for a loan on a single income.
This change will allow applicants with sub-620 scores to be added to the loan in some cases, allowing the lender to consider their income. This is especially helpful when the lower-credit borrower makes most of the money.
| Middle credit score | Annual Income | |
|---|---|---|
| Borrower 1 | 590 | $75,000 |
| Borrower 2 | 810 | $25,000 |
| Former rules | Eligibility score: 590 (disqualifies co-borrower) | Eligible income: $25,000 (high-credit borrower only) |
| New rules | Eligibility score: 700 | Eligible income: $100,000 |
As long as one borrower's score is high enough, they have a chance to apply and use total household income.
Fannie Mae's announcement is a huge change for approval standards. Even if you've been denied in the past, you may receive an approval under new rules.