A reader asks, “I have Bankruptcy discharged June 1 2011. I do not have lots of credit. Have small inheritance from mother. I Want to purchase small house in Cleveland, Georgia. I have joined Equifax (663), TransUnion (718) and Experian (638). When I access each one has a score different than the other credit reporting agency. How can I determine my creditworthiness?”
FHA loan rules say that in general, when a FICO score is available, the lender is required to use it to help determine a borrower’s creditworthiness. The credit score alone doesn’t tell the whole story–there are other factors that play a part in whether or not an FHA loan is approved–but it does play an important role
The instructions for the lender on how to process credit score information are found in HUD 4155.1 Chapter Four, Section A under the heading “Definition of Minimum Decision Credit Score”. The lender is instructed:
“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.”
In cases where the borrower has insufficient credit history, HUD 4155.1 tells the lender, “For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from
• utility payment records
• rental payments
• automobile insurance payments, and
• other means of direct access from the credit provider”
As mentioned above, there are other factors that can determine whether or not an FHA loan is approved. The borrower’s debt to income ratio plays a part–if the borrower has too much debt and not enough income to offset it, the loan could be denied unless there are compensating factors such as a larger down payment, “substantial cash reserves”, anticipated additional income and other factors.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.