FICO scores play an important part in any home loan application. There is often confusion about FICO scores, with some applicants assuming that only FICO scores determine loan approval, while others wrongly assuming they only have one credit score.
What’s the reality? There are three major credit reporting agencies, (Equifax, TransUnion, Experian) and so a borrower may actually have three different scores. That is one reason why lenders encourage borrowers to check their credit reports as early as possible before applying for an FHA mortgage. One credit report could have discrepancies another one does not reflect, etc. A borrower should always know what the lender is going to see on the report before the application is filled out.
FICO scores are indeed an important part of FHA loan approval, but they aren’t the only factor. Your loan repayment history (and your record of paying all financial obligations in the 12 months leading up to the new loan application) are also just as important as FICO scores.
But FICO scores are crucial in one very important area aside from basic loan approval. Your down payment amount can, and often is, determined by your FICO score.
What does that mean? In simple terms, the FHA single family home loan program has a set of FICO scores that allows a borrower to qualify for FHA maximum financing (which includes a required 3.5% down payment). Applicants with FICO scores of 580 or better technically qualify for maximum financing.
Borrowers with FICO scores below 580, but not lower than 500, are technically qualified for an FHA loan but must provide a minimum of 10% down.
But there’s a caveat to this borrower should know. While the FICO scores mentioned above may qualify according to FHA standards, lender standards may also apply. You may find lenders requiring higher FICO scores (620 to 640 in many cases) for loan approval. Down payment standards may also be affected by lender rules.
So it’s very important to do two things in the planning stages of your FHA home loan application. Find out what your FICO scores are from the three major credit reporting agencies, and also learn what your chosen lender or potential lender will require in terms of FICO scores. Knowing both of these things will help you learn what may be required to happen next.
Borrowers who need to improve FICO scores can take steps to improve their credit. Those who feel a given lender’s standards may or may not be reasonable can continue to shop around for a participating lender.
Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today: