December 9, 2013
A reader asks, “My son and his wife are looking to buy their first home but both have credit scores in the 570-580 range. My parents will gladly act as co-signer or co-borrower with them and their credit history is excellent. Would that help them get a loan?”
FHA loan FICO score requirements state that borrowers with credit scores at or above 580 are “eligible for maximum financing”. However, lenders are free to require higher FICO scores than the FHA minimums and often do.
Borrowers with FICO scores below 620 (and in many cases, 640) may have difficulty finding a lender willing to work with them on an FHA mortgage loan. This may or may not be true when a co-signer or co-borrower is present. In such cases the lender’s standards would apply.
In any case, all co-signers and co-borrowers are required to meet similar FHA loan standards for creditworthiness. Consider what FHA loan rules found in HUD 4155.1 Chapter Four Section A have to say:
“When determining the creditworthiness of borrowers, coborrowers, or cosigners, the underwriter considers their
• income
• assets
• liabilities, and
• credit histories.”
As a reminder, the FHA loan rules do recognize a distinction between a co-borrower and a co-signer. “Both occupying and non-occupying borrowers and coborrowers
• take title to the property at settlement
• are obligated on the mortgage note, and
• must sign all security instruments.”
When it comes to co-signers, FHA loan rules in Chapter Four of HUD 4155.1 state:
“Cosigners
- do not hold ownership interest in a property
- are obligated on the mortgage note and have no liability for repaying the obligation, and
- must complete and sign all loan documents except the security instruments.”
With or without a co-borrower/cosigner, applicants who want an FHA loan but come to the bargaining table with credit scores less than 620 should consider contacting the FHA at 1-800 CALL FHA to ask for a referral to an FHA-approved housing counselor in the local area who can offer advice on preparing for an FHA loan. Taking the time to examine and raise credit scores, work on repayment history, and other pre-application tasks are a major part of the prep process for an FHA mortgage.
The FHA-referred housing counselor can help borrowers be as prepared for the FHA loan application process as possible, but it does take time. Finance experts recommend preparing for a home loan application at least 12 months in advance.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get preapproved for an FHA loan at www.FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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