FHA 203k Loan With Under 600 Credit Scores Mortgage Guidelines


FHA 203k Loan With Under 600 Credit Scores Mortgage Guidelines

This BLOG On FHA 203k Loan With Under 600 Credit Scores Mortgage Guidelines Was UPDATED On July 11th, 2018

Can home buyers get an FHA 203k home loan with under a 600 Credit Score?

  • Gustan Cho Associates specializes in FHA 203k Loan With Under 600 Credit Scores
  • We are experts in originating and funding FHA Home Loan With Lower Credit Scores and Bad Credit

Legend has it in the mortgage industry’s inner sanctum of urban lending myths that a client known as the Hip Hop House Remodeler, or HHHR, done got a FHA 203k with a 586 credit score. You heard it, but do you believe it? I know it to be true. Yet, I still have a hard time believing it.

Benefits Of FHA 203k Loan With Under 600 Credit Scores

For those who don’t know the FHA 203k is a mortgage in which home buyers can buy the ugliest house the block and gets dah money to make it the best casa in the neighborhood.

  • Home buyers actually borrow more than the purchase price
  • For example, if purchase price is $120,000 and need $50,000 to put a new roof, siding, a kitchen, and some paint to make the house beautiful, the FHA 203k is a loan that will combine that $120,000 purchase price and the $50,000 rehab budget
  • The 203k takes the combined amount of $170,000 and allows borrowers to borrow 96.5% of this adjusted amount or $164,050
  • So if borrowers notice the loan amount of $164,050 is higher than purchase price of $120,000, this is the reason why

FHA 203k Loans Are Considered Riskier Loans

Just by using some basic common sense one can assume this type of FHA loan is higher risk than a regular FHA purchase

  • This is because home buyers are borrowing more than the house it worth
  • They are borrowing 96.5% of the loan amount that is more than the purchase price
  • In practice the FHA 203k borrower as very little money into the transaction compared to the lender the FHA insurance guarantee fund
  • With this said, typically the underwriting requirements are typically tougher on a FHA 203k than a regular FHA loan
  • Plus, the existing property being loaned on is typically in bad shape

Most Lenders Have Overlays On FHA 203k Loans

Most lenders require a minimum credit score of 640.

  • Some lenders go down to a 620 scored
  • I even heard another legend of a FHA 203k lender that did one with a 600 score.  ….but a 580 something score
  • The lender has to use the lower middle score of both borrowers
  • A FHA 203k with a credit score under 60 is hard to believe

HHHR actually had a 636 middle credit score. The problem is his debt to income ratio was well over 50% of his paycheck. That’s problem for a 203k if you have a 720 score.

To combat this a co-borrower, HHHR’s wife, was added to the loan. Now their debt ratio was acceptable, but her middle credit score was in the 580’s.

FHA 203k Loan With Under 600 Credit Scores: Manual Underwrite

There is a little know FHA practice called the manual underwrite.

  • Most lenders don’t even think about it anymore
  • If client doesn’t have a positive Automated Underwriting System decision, most lenders throw you away like yesterday’s trash
  • However, in HHHR, and his spouse’s case they had a combined debt ration of under 40%
  • Typically, when credit score is under 40% lenders that are capable can manually underwrite loan
  • So the clients found that lender

Mortgage Rates On Borrowers With Under 600 Credit Scores

The next problem was pricing. The new laws coupled with the low credit score hits make a sub 600 score FHA 203k mortgage virtually impossible. What happens if borrowers credit score is under 640 borrowers have substantial pricing cost, if it’s under 620 borrowers have a bigger pricing hit, and if credit score is under 600, the pricing hit is huge. When combining this with the new High Cost and QM mortgage laws this mortgage was basically impossible. It closed anyway. There was basically no money made, but the clients now have their dream home.

Related> What Is A FHA 203k Loan?

Related> What Are FHA 203k Rehab Loans?

  1. Patricia Schulz says

    Loan in Illinois

    1. Gustan Cho says

      Good afternoon Trish. We do FHA 203k Loans in Illinois.

  2. Jason Reiber says

    Loan in Indiana

    1. Gustan Cho says

      We do loan in Indiana. Please contact Kay Sritpetcharakool at 954-496-2698

  3. Majosie says

    Hi do you loan in Alabama?

    1. admin says

      yes we do, please call me at 800.900.8569.

  4. Ameer Jordan says

    Fha specialist in Dc and Maryland?

    1. Gustan Cho, NMLS 873293 says

      Good afternoon. USA Mortgage is licensed in District of Columbia and Maryland.

  5. Melanie bredbanner says

    Do you do these loans in michigan

    1. Gustan Cho, NMLS 873293 says

      Yes. We are licensed in Michigan. Please call or text us at 262-716-8151 or email us at gcho@loancabin.com.

  6. Trevor says

    How about minnesota

    1. Gustan Cho, NMLS 873293 says

      Can you please email me with your contact information and I will refer you to a lender in Minnesota with little to no lender overlays. My email address is gcho@loancabin.com.

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