That title is pretty sensational, but there are indications in the American economy that credit scores are going to be very important in the era of coronavirus and COVID-19. That’s not based on speculation; mortgage lenders across America are reconsidering their FICO score requirements for home loan approval, making scores in the mid to upper 600 range less of a sure thing for loan approval than they were previously.
For the record, FICO scores are NOT the only factor that affects your home loan, auto loan, or personal loan decision. Your record of on-time payments and your levels of credit utilization are also important, as we’ll see.
Look at the official sites for any of the big-three credit reporting agencies (TransUnion, Experian, and Equifax) and you will find credit education sections which all say the same thing; late and missed payments are among the leading causes of loan denial, and directly result in lower FICO scores and reduced ability to borrow. The payment you skip today will affect the loan application that gets filled out next week. Or next month. Believe it or not, next year, too.
A HousingWire.com article published on April 3 is a good indicator of what we are talking about here; the article acknowledges that mortgage lenders are raising credit score standards during the economic crisis started by COVID-19. How does this work?
Lenders Are Raising Credit Requirements
Lenders offering VA, FHA, or USDA mortgage loans will take those program standards, review the FICO score requirements for each program, and decide what additional requirements may apply depending on the applicant’s financial qualifications. For example, FHA home loans say that you can be approved for a home loan at maximum financing (3.5% down) if your credit scores are 580 or better.
But the lender may decide that that score range is too low and create a policy where an FHA mortgage is approved for maximum financing with the lowest possible down payment starting at FICO scores of 640 or higher. This addition to the minimum standard provided by the FHA loan program is known in the industry as a “lender overlay” and this is permitted by FHA, VA, and USDA program rules.
How Loans Are Approved
There are several factors that contribute to loan approval: FICO scores, on-time payments, and credit utilization are the most important. How do you protect your credit to survive the financial crisis started by COVID-19? It’s a lot simpler than you might realize, but in tough economic times, these steps can be challenging.
How To Protect Your Credit Score
Protecting your credit means three things: always paying on time for a minimum of one year leading up to a major credit application, reducing the amount of credit card use you have on each account (under 50% of your total credit limit is a great start, 30% or less is ideal), and increasing the amount of money you have leftover at the end of the month after your bills are all paid.
That is known as your debt-to-income ratio and it is a very important part of the equation.
Does that sound too simple? In normal times, perhaps. But in times when there is a massive surge in unemployment claims, the act of paying on time can be daunting.
How To Protect Your Credit When You Cannot Pay
In normal times, even when you make arrangements, you still may run the risk of having negative credit reporting on a late or missed payment. In the age of coronavirus economic bailout legislation, some negative credit reporting may be suspended, but there is a catch.
YOU MUST CONTACT YOUR CREDITORS TO MAKE ARRANGEMENTS.
None of the economic relief measures passed by Congress or initiated by the lending industry are automatic. If you have not called your creditors to discuss alternate payment options, you are not protected against negative credit reporting for late or missed payments.
When you call your mortgage lender, auto loan servicer, or credit card companies to discuss payment options, you can avoid negative credit reporting and protect your credit. Remember that there is no one-size-fits-all solution, you will need to call ALL creditors to make payment arrangements.
If you don’t do this crucial step, your credit will suffer eventually. There may be some delay as companies “catch up” with credit reporting after the final end of social distancing orders and other measures, but the credit agencies will manage to catch up.
Do Not Pay Third Parties To “Fix” Your Credit
What you should pay (with your time and/or money) third parties to do for you, creditwise? Getting advice on structuring a financial plan that can help you address your credit problems long-term, paying a financial planner to help you make sound decisions about where to pay down your bills, whether or not to invest, etc.
You can also learn how to prepare for a major credit application, what makes you a better credit risk, etc.
What you SHOULD NOT pay third parties to do? For a start, no third party can remove current, accurate negative credit data from your report. ANY company that promises the can do so is not telling you the whole truth and is in reality NOT helping you.
All the major credit reporting agencies remind consumers that accurate, current negative credit data WILL REMAIN on your report, even if contested unless by contesting the problem the information is shown to be INACCURATE after all.