Minimum FICO rule

By loanDepot Staff Writers

In the real estate industry, there’s a little known rule of which many borrowers, especially first-time homebuyers, are not aware. It’s called the minimum FICO rule, and it can save borrowers tens of thousands of dollars in interest over the life of their loan. If you are borrowing jointly, knowing this rule and using it to your advantage can have a huge impact on the interest you pay on the loan.

Your colleagues at loanDepot’s Retail Lending division want to make sure your clients get the best deal available to them. For more information on the minimum FICO rule, call us today at (877) 431-0100.

What is the minimum FICO rule?

It is estimated that more than 24,000 borrowers who took out home loans in recent years are paying more than they could be on interest – up to $1,400 more a year in some cases – according to a study conducted by economists at the Federal Reserve.

Borrowers who filed a joint application for a home loan would have been better off only applying in the name of the borrower with the better credit score, the study found. This is because joint applications take the lower of the two borrowers’ credit scores – known as the minimum FICO rule – and the borrower’s interest rate is determined based on the lower of the two scores.

Almost 10 percent of homebuyers who applied jointly could have saved money, the study found. Having the borrower with the higher credit score apply for the loan solely would have lowered the interest rate by one-eighth of a percent had they known about the rule.

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Borrowers with lower FICO scores averaged significantly higher interest rates.

More than 25 percent of joint applications in which one of the borrower’s credit score was below 740 could have reduced borrowing costs, according to the study. The majority of couples affected by the minimum FICO rule were younger, first-time homebuyers. Middle-aged borrowers, both high- and low-income earners, were found to be more like to take advantage of the rule.

Qualifying for a home loan with the minimum FICO rule

However, there’s one caveat. The individual borrower must be able to qualify for the loan on their own. The borrower with the higher credit score must also prove they have the income and proper debt-to-income ratio (DTI) to be approved. This is a sticking point for many young homebuyers who rely on joint income to purchase a home.

Government-sponsored enterprises, such as Fannie Mae and Freddie Mac, and most lenders use the minimum FICO rule. The lender will run a credit report on both borrowers when evaluating the loan application. Even if one borrower has a good score that would qualify for more favorable terms, the minimum FICO rule says the lender must use the lower of the two scores, which can sometimes result in a higher rate.

To learn more about the minimum FICO score and applying jointly for a home loan, speak with a licensed loan officer at loanDepot’s Retail Lending division today. Click here to locate your local loan consultant.