Update 2016 FHA Credit Score Requirements
What Are 2016 FHA Credit Score Requirements:
2016 FHA Credit Score Requirements have several moving parts and depending what your credit scores are, it may affect the debt to income ratio requirements . FHA Loans, unlike other residential mortgage loan programs, limits and sets debt to income ratio requirements dependent on the mortgage loan borrower’s credit scores and this factor is factored in with the Automated Underwriting System . Credit Scores also determine the down payment required on FHA Loans. To qualify for a 3.5% down payment FHA home purchase mortgage loan, FHA requires a minimum credit score of 580 FICO. Home buyers with credit scores between 500 FICO and 579 FICO can qualify for FHA Loans, however, instead of 3.5% down payment, 10% down payment is required for borrowers with credit scores between 500 FICO and 579 FICO credit scores. Credit Scores also determines mortgage rates on FHA Loans. Mortgage Rates on FHA Loans are not as credit score sensitive as it is with conventional loans. To get the best mortgage rates on conventional loans, a conventional mortgage loan borrower would need credit scores of at least 740 FICO or higher and for every 20 FICO point drop, the conventional mortgage rates will get slightly higher. Mortgage lenders and creditors in general view higher credit score borrowers as less risk when lending money and lower credit score borrowers as higher risk. Since FHA Loans are insured by the Federal Housing Administration against borrower’s default to FHA approved mortgage lenders, the credit score risk is limited to FHA approved mortgage lenders so this is the reason why credit scores are not as sensitive on FHA Loans as they are with Conventional Loans. To get the best FHA mortgage rates, borrowers would need a 680 FICO credit score. Those with credit scores under 640 FICO will get higher mortgage rates and those under 600 FICO credit scores will get the highest mortgage rates. Since the mortgage industry is so highly regulated, high mortgage rates on FHA Loans will not exceed 4.75% on borrowers with credit scores under 600 FICO . You will not see any FHA mortgage lenders offer mortgage rates on FHA Loans over 6.0% and even in the 5.0% mortgage rates is extremely rare.
2016 FHA Credit Score Requirements And Impact On Debt To Income Ratios
Credit Scores will have an impact on debt to income ratio requirements with FHA insured mortgage loan. 2016 FHA Credit Score Requirements for a 3.5% down payment FHA home purchase loan is 580 FICO Credit Scores. However, there is a significant difference in qualifying for a FHA Loan with credit score of under 620 FICO. Just because 2016 FHA Credit Score Requirements on a 3.5% down payment home purchase loan is 580 FICO does not mean that any mortgage loan borrower with a 580 FICO credit score is home free and get a FHA mortgage loan. There are mandatory requirements for mortgage loan borrowers with credit scores under 620 FICO. First and the most important factor that FHA requires on credit scores under 620 FICO is that the debt to income ratio requirements gets reduced to 43% DTI. If your credit scores are at least at 620 FICO or higher, the back end debt to income ratio requirements to qualify for a FHA Loan gets capped at 56.9% DTI. Another issue that FHA loan borrowers that have under 620 FICO credit scores may need is verification of rent . Verification of rent can only be valid if the renter has paid his monthly rental payments with a check for the past 12 months or has done a bank wire from their bank account to the landlord’s bank account and has paid timely in the past 12 months. No late payments in their monthly rent payments is allowed.
Mortgage Loan Borrowers with credit scores under 620 FICO may be required to have three months reserves . One month reserves is equivalent to one month’s PITI, which is one month principal, interest, taxes, and insurance. Reserves cannot be gifted and needs to be the mortgage loan borrower’s own funds. Reserves do not have to be held in escrow and can just remain in the borrower’s bank account. Other assets such as investment accounts and 401k retirement accounts can be used for reserves.