Recently we posted a reader question about FICO scores and FHA loan approval. The reader wanted to know why a credit score range between 540 and 618 didn’t qualify for an FHA mortgage.
The reader question included the following: “My scores are 618 – 595 – 540…why couldn’t I qualify for this loan?”
There are two factors at work when viewing FICO scores. The lender is required to observe FHA loan minimums–which this reader was technically able to meet. But the lender is also required to observe the FICO minimums established by the financial institution. If the FICO score doesn’t meet the bank’s minimum, it’s not eligible for FHA loan approval.
How does the lender interpret the three credit scores to determine eligibility if a borrower is right on the edge of the required minimums? FHA loan rules as found in HUD 4155.1 Chapter Four Section A gives us some insight into how that works:
“4155.1 4.A.1.j Definition of Minimum Decision Credit Score
If a credit score is available, it must be used to determine the decision credit score for the application and for eligibility for FHA-insured mortgage financing.”
“A ‘decision credit score’ is determined for each applicant according to the following rule: when three scores are available (one from each repository), the median (middle) value is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.”
Many lenders require a minimum FICO score of 620 or higher. Some require 640 or higher. In this particular case, the reader’s middle FICO score would not meet the requirements of a lender requiring a 620 FICO score as the middle FICO score is at 595. Borrowers who want to improve their credit scores to qualify for an FHA mortgage loan should contact the FHA (1-800-CALL FHA) to request a referral to an FHA approved pre-purchase counselor for advice.
Do you have questions about FHA loans? Ask us in the comments section.