Is Credit Score the ultimate decider in lending??! Should it be?

Question

So I can have free and clear properties and no-one will touch my file to cash out, with great properties in 1st lien position (security!!!, less risk!!). But someone with great credit and zero assets can get a loan?.. Explain this to me please..

Christine Mwai · Answer

Great points by both of you above and thanks for your input. I've found that sometimes it's about finding the right lender for one's situation that is willing to take the time to look at the "whole situation"....

Christopher Phillips · Answer

@Christine Mwai

In a very broad since, cash-out refinancing looks a few things:

Debt to income ratio (36% or less)

LTV for the property (75% or less)

Minimum credit score (660 or better)

Months of reserves ( 0 to 6 months)

These are all interrelated and if DTI or FICO are off requirements and expectations it will impact approval.

If a property owner has a low FICO due to high DTI, has a lack of reserves, or not enough equity in their property, they are a high risk to lend to.

lenders aren't in the business of foreclosing and owning properties. They are in the business of earning a return for their investors. Having an excessive amount of bad real estate on their books lowers their credit rating and scares away their investors. So, ever institution has a very rigid set of criteria, some of which is driven by Fannie Mae and some driven by their own internal standards.

Christine Mwai · Answer

I see and know your point Chris Mason... Yes, I too would have baseline criteria.Is there really more protection though in lending based on  credit score? What if that person with great credit score has a life event the next month or year?... either way, the collateral is taken whether it was an asset based or a credit based loan?

Christine Mwai · Answer

Ok, I guess what I'm saying is that in both cases the lender still has first lien position. What makes one scenario less riskier than the other?

Chris Mason · Answer

Hi @Christine Mwai,

Private money and portfolio ARMs might go for it.

The big agencies, Fannie/Freddie/FHA/VA/USDA, have to make one-size-fits-all rules based in no small part on aggregate data. They have to do this so that they can promise XYZ Lending Corporation that they will purchase the loan on the secondary market after it closes. We've seen the loans we sell to Fannie, but she is buying those loans sight unseen.

If you were going to promise to buy a big expensive thing sight-unseen, you'd probably establish some baseline "it must have X, or you buy it back from me cuz I don't wan't it" rules for people selling you those things sight-unseen too, wouldn't you? Or would you agree to buy a house from me, sight unseen, without any baseline minimum criteria?