2016 FHA Guidelines On Credit Scores Versus DTI Explained

What Are 2016 FHA Guidelines On Credit Scores Versus DTI

2016 FHA Guidelines On Credit Scores Versus DTI are specific and important when qualifying for FHA Loans for borrowers with higher debt to income ratios and lower credit scores. FHA Guidelines On Credit Scores require a minimum credit score of 580 FICO for a FHA mortgage loan borrower to qualify for a 3.5% down payment FHA home purchase mortgage loan. Home buyers with under 580 credit scores can qualify for a FHA insured mortgage loan, however, a 10% down payment on a home purchase is required for borrowers with credit scores between 500 FICO and 579 FICO credit scores. FHA is the only mortgage loan program that has debt to income ratio requirements versus a borrowers credit scores. A mortgage loan borrower’s credit scores will determine the maximum debt to income ratio the borrower will be allowed.

2016 FHA Guidelines On Credit Scores Versus DTI: DTI Caps

FHA will require a maximum debt to income ratio of 43% DTI for FHA mortgage loan borrowers with credit scores of under 620 FICO credit scores in order for the Automated Underwriting System , also referred to as AUS, to render an approve/eligible. The Automated Underwriting System is what mortgage lenders require in order for the mortgage file to move forward. Mortgage lenders who have no mortgage lender overlays like myself will just go off the automated findings from the Automated Underwriting System and an approve/eligible per automated findings is your loan approval as long as the borrower can provide all the conditions that states on the automated findings. Many mortgage lenders have mortgage lender overlays on credit scores as well as debt to income ratios. Mortgage lender overlays are additional mortgage lending guidelines that are above and beyond those of the minimum mortgage lending guidelines set by FHA. For example, many mortgage lenders will require a credit score of 620 FICO credit scores when FHA only requires a 580 FICO credit score. The 620 FICO credit score required by a mortgage lender is called a lender overlay on credit score by that particular mortgage lender because that mortgage lender is requiring a higher credit score requirement than the credit score required by FHA. Same with debt to income ratios. Many mortgage lenders do have mortgage lender overlays on debt to income ratios. FHA requires a maximum debt to income ratio requirement of a 56.9% DTI for FHA mortgage loan borrowers with credit scores of 620 FICO credit scores or higher. However, many mortgage lenders may cap the debt to income ratio requirements to 45% DTI or 50% DTI even though FHA allows up to a 56.9% DTI for borrowers with credit scores of at least 620 FICO. This higher standard of debt to income ratio requirements is called a debt to income ratio mortgage lender overlay on behalf of the FHA mortgage lender. Mortgage lenders can also set their own FHA Guidelines On Credit Scores Versus DTI. For example, I know of many mortgage lenders that will cap the debt to income ratios of a FHA mortgage borrower to 45% DTI for borrowers with credit scores of under 680 FICO and increase it to 50% DTI for FHA mortgage loan borrowers with credit scores of 680 FICO credit scores or higher even though the debt to income ratio cap on FHA Loans is 56.9% DTI for FHA mortgage borrowers with credit scores of 620 FICO credit scores or higher.  If you have lower credit scores and higher debt to income ratios and need a FHA mortgage lender who has no mortgage lender overlays on FHA Loans, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I am available 7 days a week, evenings, weekends, and holidays to take your phone call and answer any questions you may have.

FHA Guidelines On Credit Scores Versus DTI: Co-Borrowers

If you are married and have a non-working spouse, there is no reason for the non-working spouse to be on the FHA Loan. Even if your spouse is working but do not need the spouse’s income to qualify for the FHA Loan, it is recommended that you do not include the spouse on the FHA Loan. As long as one person can qualify for the FHA Loan, no need to add the other person. The spouse not on the FHA Loan can be on title but not on the mortgage loan. If you have more than one borrower on a FHA Loan, the lower middle score of the two borrower’s credit score will be used for qualification of the FHA Loan. Lets take a case scenario on John Smith and Mary Smith.

Borrower                              Experian                              TransUnion                           Equifax

John Smith                                700                                           750                                               800

Mary Smith                                550                                            600                                              650

Lets say that John Smith and Mary Smith are married but Mary Smith income is not necessary because John Smith makes enough money for their new home purchase with a FHA Loan. The middle credit score for John Smith is 750 FICO credit score and the middle credit score for Mary Smith is 600 FICO. Mary Smith wants to do things together because they are married, however, by adding Mary Smith to the mortgage loan, then the 600 FICO credit score will be used instead of John’s middle score of 750 FICO credit scores. The mortgage rates will be higher because with FHA Loans, there is a larger price adjustments on mortgage interest rates on borrowers with credit scores of under 640 FICO credit scores. Plus the debt to income ratios can be at 56.9% DTI if we just use John Smith where if both people are used, then the lower of the two borrower’s credit scores, Mary Smith’s 600 FICO credit scores, will be used and the maximum debt to income ratios permitted under FHA Guidelines On Credit Scores will be 43% DTI.

Again, on the above case scenario, it is best not to use Mary Smith as a co-borrower if John Smith qualifies on his own. Mary Smith and John Smith can both be on title but why add Mary Smith on to the FHA Loan if she does not need to be on the loan. Again, both John Smith and Mary Smith can be on title.

 

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