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FHA Guidelines On Credit Scores Versus DTI On Home Purchase

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FHA Guidelines On Credit Scores Versus DTI On Home Purchase

This BLOG On FHA Guidelines On Credit Scores Versus DTI On Home Purchase Was UPDATED On February 11th, 2019

What Are FHA Guidelines On Credit Scores Versus DTI

FHA Guidelines On Credit Scores Versus DTI are specific. Credit Scores And DTI are 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
  • This is for borrower to qualify for a 3.5% down payment FHA home loans
  • Home buyers with under 580 credit scores can qualify for a FHA Loans 
  • However, a 10% down payment on a home purchase is required for borrowers with credit scores between 500 and 579 credit scores
  • FHA is the only mortgage loan program that has debt to income ratio requirements versus a borrowers credit scores
  • Borrower’s credit scores will determine the maximum debt to income ratio the borrower will be allowed

FHA Guidelines On Credit Scores Versus DTI Caps Allowed

FHA requires a maximum debt to income ratio of 43% DTI for borrowers with credit scores of under 620 in order for AUS Approval:

  • Automated Underwriting System , also referred to as AUS, renders automated findings and an approve/eligible to qualified borrowers
  • The Automated Underwriting System is what lenders require in order for the mortgage file to move forward
  • Lenders who have no mortgage lender overlays like myself will just go off the automated findings from the Automated Underwriting System
  • An approve/eligible per automated findings is automated approval
  • As long as the borrower can provide all the conditions that states on the automated findings the loan should close and fund
  • Many lenders have overlays on credit scores as well as debt to income ratios
  • Lender overlays are additional lending guidelines that are above and beyond those of the minimum guidelines set by HUD, the parent of FHA
  • For example, many lenders will require a credit score of 620 credit scores even though FHA only requires a 580
  • The 620 credit score required by a lender is called a lender overlays on credit score by that particular mortgage lender
  • This lender is requiring a higher credit score requirement than the credit score required by FHA not because of FHA Guidelines but because their mortgage company set a higher credit score requirement
  • Same with debt to income ratios

Overlays On Debt To Income Ratios By Lenders

  • Many lenders have overlays on debt to income ratios
  • FHA requires a maximum debt to income ratio requirement of a 56.9% back end and 46.9% front end on borrowers with at least a 620 credit scores or higher
  • However, many lenders may cap the debt to income ratio requirements to 45% DTI or 50% DTI
  • This is even though FHA allows up to a 56.9% DTI for borrowers with credit scores of at least 620
  • This higher standard of debt to income ratio requirements is called a debt to income ratio overlay on behalf of the individual lender
  • Lenders can also set their own FHA Guidelines On Credit Scores Versus DTI
  • For example, I know of many lenders that will cap the debt to income ratios to 45% DTI for borrowers with credit scores of under 680 and increase it to 50% DTI for borrowers with credit scores of 680 credit scores or higher
  • This is required even though the debt to income ratio cap on FHA Loans is 56.9% DTI for borrowers with credit scores of 620 credit scores or higher

Borrowers with lower credit scores and higher debt to income ratios and need a lender with no lender overlays on FHA Loans, please contact us at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. Our team and I are available 7 days a week, evenings, weekends, and holidays to take calls and answer any questions.

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 spouse is working but do not need the spouse’s income to qualify for the FHA Loan, it is recommended 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
  • Borrowers with more than one borrower on a FHA Loan, the lower middle score of  borrower’s lower middle credit score will be used 

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 and the middle credit score for Mary Smith is 600
  • Mary Smith wants to do things together because they are married
  • However, by adding Mary Smith to the mortgage loan, then the 600 score will be used instead of John’s middle score of 750 
  • 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 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 credit scores, will be used and the maximum debt to income ratios permitted under FHA Guidelines On Credit Scores will be 43% DTI to get an approve/eligible per AUS

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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