In this article, we will cover and discuss the options homebuyers have after they got an FHA loan denied for low credit scores in Ohio with an approve/eligible per automated underwriting system. One of the misconceptions consumers have is that all lenders have the same lending requirements on FHA loans since they are government loans. All mortgage loan programs have minimum credit score requirements. FHA minimum credit scores depend on the amount of down payment. FHA minimum credit scores will have an impact on debt-to-income ratios. HUD announced that FHA Guidelines with regard to credit scores will remain the same as last year.
FHA Loan Denied For Low Credit Scores in Ohio Due to Lender Overlays
Besides FHA minimum credit scores required, borrowers also need to meet other qualifying factors such as the following:
- debt to income ratio minimum requirements
- waiting period requirements after bankruptcy and foreclosure
- verification of rent requirements if mandated by the automated underwriting system
- other factors requested by the automated findings
- or by the mortgage underwriter if it is a manual underwrite
FHA loans are one of the most popular home loan programs in the Nation due to their lenient guidelines and low mortgage rates due to the government guarantee.
FHA Loan Denied For Low Credit Scores in Ohio After Loan Officer Pre-Approval
Borrowers with credit scores of at least 620 or higher, can qualify for a 3.5% down payment FHA loan and have a front end debt to income ratio as high as 46.9% and back end debt to income ratio as high as 56.9% to get AUS Approval. 100% gift funds are allowed with credit scores higher than 620. Verification of rent is normally not required with credit scores higher than 620 credit scores.
FHA Loan Denied For Low Credit Scores in Ohio With Over 580 FICO
Homebuyers can qualify for an FHA loan in Ohio with a 3.5% down payment with a 580 minimum credit score. For any borrowers whose credit scores are under 580, FHA requires a 10% down payment. The minimum down payment required is 3.5% down payment for a home purchase but borrowers need a minimum of 580 credit scores. However, a major disadvantage of having credit scores under 620 is that the debt to ratio cap drops significantly to get approve/eligible per Automated Underwriting System.
Reason Why Borrower Got an FHA Loan Denied For Low Credit Scores in Ohio
If credit scores fall between 580 and 579 the debt to income ratio is capped at 43% by AUS. Many lenders may require verification of rent for borrowers with credit scores under 620. This is the case even though the automated findings may not request it. Although FHA allows up to 100% gifted funds for the down payment, many lenders may require that gift funds are not allowed as part of their lender overlays. It is up to the lender as part of their overlays to require that the borrower’s own funds are permitted for the down payment. Some lenders may require reserves. One month’s reserves are one month of principal, interest, taxes, and insurance also referred to as PITI. Many lenders may require verification of rent for borrowers with credit scores between 580 and 620.
Is It Possible For FHA Loan Denied For Low Credit Scores in Ohio If Borrower Got AUS Approval
FHA Credit Score Guidelines on minimum credit scores to qualify for FHA loan is 500. However, as mentioned earlier, if credit scores fall below 580, a 10% minimum down payment is required. Just coming up with the 10% down payment is not the only requirement. Lenders are extremely careful when underwriting borrowers with credit scores under 580. The mortgage rate will definitely be much higher. Rental verification will be required because of the payment shock issue. Payment shock is the percentage of what the renter is currently paying compared to the new principal, interest, taxes, and insurance payment.
FHA Loan Denied For Low Credit Scores in Ohio and No Rental Verification
For example, here is a case scenario:
- if current rent is $1,000 per month
- the new proposed mortgage payment will be $1,050 per month
- the payment shock is only 5%
- which is great and the new homeowner will have no problem adjusting to the new proposed housing payment
Rental verification from a private landlord can only be used by providing 12 months of canceled checks. Rental verification from a property management company can be used if VOR Form provided by the lender can be completed by the property manager in lieu of 12 months of canceled checks and/or bank statements. At Gustan Cho Associates, borrowers are exempt from verification of rent if they are living rent-free with family to save money for the down payment for their home purchase.
FHA Loan Denied For Low Credit Scores in Ohio is Due to Lender Overlays
The above FHA Credit Score Guidelines to qualify for FHA Loan are those implemented by HUD, the parent of FHA. However, lenders may have their own FHA mortgage lending overlays which surpass the minimum mandated by FHA. This is why borrowers get an FHA loan denied for low credit scores in Ohio. Helping borrowers who got an FHA loan denied for low credit scores in Ohio is not a big issue at Gustan Cho Associates. Over 75% of our borrowers are folks who could not qualify at other lenders.
For example, here is a case scenario:
- 3.5% down payment FHA loan
- required is 580 credit scores
- many banks, credit unions, and mortgage bankers may not accept any FHA mortgage loan applicants who do not have a 640 credit score
- These banks, credit unions, and mortgage companies with credit score overlays tell these potential home buyers that they do not qualify
Homebuyers who are told they do not qualify due to not meeting the 620 to 640 credit scores, no worries. Contact us at Gustan Cho Associates Mortgage Group at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates is a no overlay lender and just go off the minimum HUD lending guidelines and have no overlays. The minimum credit score to qualify for FHA Loan is 580 with a 3.5% down payment. Borrowers with under 580 credit scores and down to 500 FICO can qualify for an FHA loan but need a 10% down payment.
Related> Improving credit scores to qualify for a mortgage
