Can You Qualify For A FHA 203k Loan With Under 600 Credit Scores?
Can you get an FHA 203k buy and rehab your home loan with under a 600 Credit Score? Gustan Cho Associates specializes in FHA 203k Loan With Under 600 Credit Scores and 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 hear, 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 you can buy the ugliest house the block and gets dah money to make it the best casa in the neighborhood. You actually borrow more than the purchase price. For example, if your purchase price is $120,000 and you 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 that $50,000 rehab budget. The 203k takes the combined amount of $170,000 and allows you to borrow 96.5% of this adjusted amount or $164,050. So if you notice your loan amount of $164,050 is higher than your purchase price of $120,000.
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 because you are borrowing more than the house it worth; and you 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 and 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 your 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 your credit score is under 40% lenders that are capable can manually underwrite your 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 your score is under 640 you have substantial pricing cost, if it’s under 620 you have a bigger pricing hit, and if you score is under 600, the pricing hit is huge. When you combine 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.
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