Minimum Credit Score For FHA Loans Mortgage Guidelines
This Article Is About The Minimum Credit Score For FHA Loans Mortgage Guidelines
HUD, the parent of FHA, is the government agency that sets the minimum credit score for FHA Loans as well as other HUD Guidelines. Many of our viewers today are reading this blog because they are getting conflicting reports on what the minimum credit score for FHA Loans are. Not all lenders have the same FHA Mortgage Guidelines. The minimum credit score requirements on FHA loans vary depending on each individual lender. Some lenders may require a 620 credit score while others may require a 640 FICO. Yet other lenders may require 580 while some may go down to 500 FICO. So what is it?
What is the Minimum Credit Score For FHA Loans? There are two types of lending requirements on FHA loans. All borrowers need to meet the minimum agency guidelines from HUD, the parent of FHA. The second lending requirement is imposed by individual lenders which are called lender overlays. Lender overlays are additional lending requirements imposed by individual lenders that are above and beyond HUD’s minimum agency guidelines. Not all lenders have the same type of lender overlays. Gustan Cho Associates has no lender overlays on FHA loans. GCA Mortgage has a national reputation for not having any lender overlays on government and conventional loans.
Minimum Credit Score For FHA Loans Mortgage Guidelines Versus Lender Overlays
There are two different types of FHA Mortgage Guidelines:
- HUD Agency Guidelines
- Lenders Overlays By Mortgage Companies
All lenders need to comply with the minimum HUD Agency Mortgage Guidelines often referred to as the HUD 4000.1 FHA Handbook. However, lenders may create and implement additional higher credit standards called lender overlays. Most lenders have lender overlays on just about anything and everything. It is perfectly legal for the lender to have their own higher credit and/or income standards called overlays. However, there are lenders like Gustan Cho Associates that have no lender overlays on government and conventional loans. Lenders overlays are the reason why the Minimum Credit Score For FHA Loans may be different among lenders.
HUD Agency Credit Score Guidelines
HUD, the parent of the Federal Housing Administration (The FHA) requires a minimum credit score of 500 FICO. However, in order for homebuyers to qualify with the least down payment possible, HUD requires a 580 credit score. The minimum down payment required for a 3.5% down payment FHA loan is 580 FICO. Borrowers under 580 FICO are eligible to qualify for FHA loans. However, the down payment requirement is 10% for borrowers under 580 FICO.
The lowest credit score borrowers can have to qualify is 500. Borrowers will need to get an approve/eligible per automated underwriting system. If borrowers cannot get an automated approval, then the lender may downgrade the file to a manual underwrite. Manual underwriting needs a refer/eligible per automated underwriting system findings. Manual underwriting guidelines apply.
The Automated Underwriting System And Automated Findings
Loan officers need to input all FHA mortgages to the Automated Underwriting System (The AUS) for automated findings. The AUS is a sophisticated automated computerized system that will analyze a borrower’s credit and income profile and render an automated decision within seconds. The automated findings will condition borrowers on automated finding approval. Although the borrower may meet credit score requirements and other HUD guidelines, they would need to get an approve/eligible per AUS. If the borrower gets a refer/eligible per AUS, then the file needs to get downgraded to a manual underwrite. FHA and VA mortgages are the only two loan programs that allow manual underwriting.
HUD Manual Underwriting Mortgage Guidelines
FHA and VA home loans are the only two mortgage programs that allow manual underwriting. The only difference between manual versus automated underwriting is the mortgage underwriter carefully analyzes the borrower’s debt to income ratio more carefully and looks for compensating factors to justify approving the loan.
Debt to income ratios on manual underwriting is as following:
- 31%/43% with no compensating factors
- 37%/47% with one compensating factor
- 40%/50% with two compensating factors
The underwriter has discretion on exceeding the above debt to income ratio guidelines on manual underwriting if the borrowers have other strong compensating factors.
Credit Scores Versus Timely Payments In The Past 12 Months
There are many instances where the automated underwriting system does not render an approve/eligible due to recent late payments. It is better to have a lower credit score and timely payments in the past 12 months versus high credit scores but recent late payments. Recent late payments in the past 24 months are frowned upon by all lenders.
One or two late payments in the past 24 months are not always deal killers. However, multiple recent late payments are considered high-risk borrowers by mortgage companies. Layered risk by lenders is carefully analyzed with borrowers with lower credit scores. HUD Agency Guidelines allow borrowers with credit scores between 500 to 579 to be eligible for FHA Loans. However, any borrowers with under 580 credit scores are required to put a 10% down payment versus a 3.5% down payment. This is due to the higher layered risk taken by both the mortgage company and HUD.
Understanding Lender Overlays On Minimum Credit Score For FHA Loans
Any lender can approve a high credit borrower with lower debt to income ratios. However, that is not how the world works. Many good hard working folks have had credit and/or income issues in the past. They have since recovered and can now qualify for a home mortgage. HUD, the parent of FHA, created and launched FHA loans to promote homeownership to first-time homebuyers and folks who had prior credit issues. One important thing borrowers need to realize is that not all lenders have the same FHA lending guidelines. Many have lender overlays.
Gustan Cho Associates is one of the very few mortgage lenders with no lender overlays on government and conventional loans. Borrowers who are told they do not qualify for an FHA loan but meet the minimum HUD guidelines, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Over 75% of our borrowers are folks who could not qualify at other lenders due to their overlays.