Applying for a home loan can be daunting; some people feel intimidated by the home loan process because of past credit mistakes they’ve made and assume they aren’t eligible for a home loan because of those mistakes. But is it safe to assume that a few problems in the past will keep you from becoming a home owner?
According to FHA rules, what makes a borrower eligible for an FHA mortgage is a combination of credit history, steady employment and your debt-to-income ratio, and the record of reliable payments in the last 12 to 24 months. The more reliable you are as a bill payer, the better chance you have of being approved for an FHA home loan.
What do the FHA loan rules say about credit scores in particular? Can a low score stand in your way?
In some cases the credit score is not a barrier to loan approval per se, but a score that is too low may require different FHA loan terms. Borrowers with credit scores at or higher than 580 may apply for maximum FHA loan financing.
Scores that fall between between 500 and 579 are “limited to a maximum LTV of 90%” at the time of this writing. That means the borrower would need to put a 10% down payment on the property in order to be approved for the loan.
Credit scores that fall below 500 are not eligible for FHA loans, so there is a “credit score floor” in place for FHA loans, but as you can see there is a range of scores that many Americans fall into which still leave them eligible to apply for an FHA mortgage.
It’s important to note that these credit score requirements apply to all FHA single family mortgage loan programs except for those found on the following list:
Section 255, Home Equity Conversion Mortgages (HECM)
HOPE for Homeowners.
There is also a set of specific credit score guidance for the FHA loan program 203(h) program, Mortgage Insurance for Disaster Victims. Different criteria may apply depending on the applicant’s circumstances. We’ll cover those issues in a different blog post.