Credit Scores and FHA LoansCompared to any other loan program, FHA is easier to qualify for, credit wise. Although FHA states that the minimum middle credit score requirement is 580, there are some restrictions to this such as sales price or loan amount, down payment, alternative trade lines, etc. Ideally, a borrower with a middle FICO score of 640 and above gets a better interest rate. There will also be no restrictions or very little overlay that a lender can impose on the loan if the borrower’s credit score is at least at 640. Needless to say, borrowers with credit scores less than 640 are not excluded in getting an FHA-insured loan. On the contrary, they can qualify for an FHA loan with a mid- FICO score as low as 580 and therefore encouraged to apply.
Borrowers looking to buy a home must know their credit standing before looking for a property to buy. Credit, Income, and Asset constitute a mortgage loan; all 3 must be present. Along these lines, credit is where most borrowers come up short. The Federal Housing Administration’s credit qualification requirement is set at 580 if a borrower wants to avail of the 3.5% down payment requisite. However, borrowers with a middle FICO score below 580 can still qualify for an FHA-insured loan. With mid-scores from 500 – 580, a borrower can qualify for an FHA loan if they can come up with 10% down payment.
After knowing where you stand when it comes to your credit, you’ll have a good understanding if you qualify for 3.5% down payment or would need an additional amount if you fall below the 580 credit score mark. Weigh the advantages and disadvantages of coming up with additional cash for down payment. Would you benefit more if you use that full amount as a down payment or are you better off using that money to work on improving your credit before anything else? You must carefully review your options before jumping in the real estate market.
The collection items showing on a borrower’s credit profile must be reviewed closely by the lender originating the loan. A collection item is defined as, any loan, debt, or account that’s submitted to the collection agency by a creditor. Not all negative credit information on a borrower’s credit profile is an automatic disapproval of the applicant. Non-medical collections and charged-off accounts are not counted against the borrower.
If the collection account balances cumulatively add up to $2,000 or more, the borrower is required to either: (a) pay the debt in full, or (b) must have a payment arrangement with the credit, and must show that payments are being made in the last 90 days and mirrors the payment arrangement itself. If neither one is applicable, the lender will sum up all open, non-medical collections, and calculate 5% of the total outstanding balance and include the payment as a debt in calculating the borrower’s debt-to-income (DTI) ratio.
For more information about FHA loans and the credit score requirements, please contact our FHA Loan Originators or use the tools on this website.