What Are The Minimum Credit Scores To Qualify For FHA Loans?

Guidelines On Minimum Credit Scores To Qualify For FHA Loans

Minimum Credit Scores To Qualify For FHA Loans depends on the amount of down payment the home buyer has. The U.S. Department of Housing and Urban Development, HUD, is the parent of the Federal Housing Administration or FHA. FHA is not a mortgage lender and has nothing to do with funding FHA Loans. FHA’s role is to insure FHA Loans to banks and mortgage companies that follow FHA Guidelines . Many consumers are confused as of the function of FHA and ask what does it mean that FHA does not originate nor fund FHA Loans and just insures them? Well, most banks and mortgage companies view that the higher the down payment a mortgage borrower puts down on a home purchase, the more skin in the game the mortgage borrower has and the less likely the borrower will default on their home loan. Therefore, the more down payment a mortgage borrower puts down on a home purchase or the lower the loan to value a homeowner has on his mortgage loan, the less the risk the lender has and the lower the mortgage interest rates will be. However, FHA only requires a 3.5% down payment for home buyers who meet the minimum credit scores to qualify for FHA Loan requirements of 580 FICO credit scores. Home buyers with credit scores of under 580 FICO credit scores require 10% down payment. You can qualify for a FHA Loan with credit scores as low as 500 FICO as long as you have 10% down payment and have strong compensating factors and substantial reserves. FHA insures HUD approved banks and mortgage lenders in the event if the FHA mortgage loan borrower defaults on their FHA Loans so the skin in the game theory where the borrower gets a lower mortgage interest rate if they put a larger amount of down payment on a home purchase no longer exists. Since FHA insures the FHA Loan against default of the FHA mortgage borrower, FHA Loans offer real low mortgage rates for FHA mortgage loan borrowers. FHA rates are substantially lower than Conventional mortgage rates due to FHA Loans being insured by FHA.

Why Do Lenders Have Different Minimum Credit Score Requirements?

Why do banks and various mortgage lenders have different credits scores to qualify for FHA Loans?  FHA has a minimum credit score requirement of 580 FICO for home buyers that want to put 3.5% down payment on a home purchase. However, many mortgage borrowers feel discouraged because they visit banks and mortgage lenders to find out that their minimum credit score requirements are substantially higher than the 580 FICO credit scores required by FHA. It is not unusual for most banks to require a minimum credit score requirement of 640 FICO and most mortgage lenders will have a 620 minimum credit score requirement even though FHA only requires a 580 credit score. This higher requirement mandated by banks and mortgage companies is called a FHA Lender Overlay on credit scores where their requirements are higher than those of FHA. There are many FHA Lender Overlays that mortgage lenders can impose besides credit scores. Banks can require lower debt to income ratios to be lower than those required by FHA. FHA will allow up to a 56.9% DTI for borrowers who have at least a 620 credit score but most banks and mortgage companies can cap debt to income ratios up to 45% DTI or 50% DTI. Some may go as high as 55% DTI. If you need to stretch the debt to income ratios up to 56.9% DTI, you need a FHA mortgage lender that has no lender overlays like myself where I am Fannie Mae direct and have no lender overlays and will just go off the AUS Findings ( Automated Underwriting System ).

Credit Scores Versus Debt To Income Ratios

Minimum credit scores to qualify for FHA Loans is 580 FICO for 3.5% down payment home purchases and those with credit scores of under 580 FICO, there is a 10% down payment requirement on a home purchase. With FHA Loans, there are debt to income ratio requirements on credit score of under 620 FICO. The highest debt to income ratios allowed for FHA borrowers with under 620 credit scores is capped at 43% DTI. FHA borrowers with credit scores of 620 FICO or higher, the maximum debt to income ratio allowed is 56.9% DTI. FHA borrowers who have higher debt to income ratios with lower credit scores may need to strive to boost their credit scores north of 620 credit scores. There are some quick fixes to boost one’s credit scores. Paying down credit card balances will definitely increase credit scores. A maxed out credit card will definitely lower a consumer’s credit scores. Having under a 20% credit balance to credit limit utilization ratio will maximize a consumer’s credit scores. Not having any revolving credit is not good for credit scores. Not having any active credit accounts is not good to your credit nor credit scores. If you have no credit trade lines, get a few secured credit cards or add yourself on to someone’s credit card account as an authorized user and your credit scores should significantly increase.

Credit Scores Versus Credit Payment History

Just because you meet the minimum credit scores to qualify for FHA Loans does not mean that you are guaranteed a FHA Loan. If you meet the minimum credit scores to qualify for FHA Loans, which is 580 FICO, the mortgage lender will look at your overall payment history. Mortgage lenders do not want to see any late payments in the past 12 months. You can have prior bad credit, open outstanding unpaid collection accounts and charge off accounts and do not have to pay outstanding collection accounts to qualify for FHA Loans, however, most mortgage lenders will want to see timely payments for the past 12 months. One or two late payments in the past 12 months is not a deal killer but should be avoided at all costs.

If you have credit scores under 620 FICO credit scores and are looking for a FHA Lender with no FHA Lender Overlays, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I am available 7 days a week, evenings, weekends, and holidays. My loan officers are licensed in most of the 50 states so we will be able to help anyone needing a mortgage lender with no lender overlays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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