A reader asks, “My husband and I both have credit scores of 628 and 635, and no late payments on any current accounts for over 1 year. Our mortgage broker told us in order to qualify for the 3.5% down we have to have a credit score of over 660 to qualify for FHA. Is this true? and if it is, do we qualify for any other FHA loan? It has been over 4 years since there has been anything derrogative on our credit reports, and the items that are on there from 4 yrs ago or more are due to an economic hardship of losing our business.”
One thing home loan applicants should know about the FHA loan program is that FHA loan minimum standards for FICO scores and other credit requirements are just that–minimums. A participating FHA lender may have more stringent requirements depending on the nature of the loan, the borrower’s financial qualifications, and other factors. A lender is free to require higher FICO scores or other factors as long as those requirements are applied fairly to all applicants in accordance with Fair Housing Act laws.
In cases such as these, a borrower may find it best to look for a lender who may be willing to offer more competitive rates or terms. In cases where a borrower’s credit is marginal according to a particular lender’s standards, FHA loan rules permit the loan to be approved using something known as compensating factors, which can include a larger down payment.
According to FHA loan rules in HUD 4155.1, the lender’s compensating factors benchmarks have a heading for “Down Payment” which includes the following guidance to the lender: “The borrower makes a large down payment of 10% or higher toward the purchase of the property” allowing the lender to approve an FHA home loan “with ratios that exceed FHA benchmark guidelines.” Those “ratios” might include debt-to-income or other credit-related issues.
It’s important to point out that there may be reasons that the lender, in the case of this particular reader question, requires the higher down payment–reasons not mentioned in the reader question. Those reasons could include a variety of things including lender policy, or the individual circumstances of the loan.
FICO scores are not the only issue examined on a credit application. To infer that simply by raising FICO scores for the loan application in question, the loan might be approved with the minimum down payment in this case would be misleading–there are many factors that affect your credit worthiness in the eyes of a lender, FICO scores are just one of those factors.
Do you have questions about FHA home loans? Ask us in the comments section.