September 12, 2016
What does it take to get approved for an FHA mortgage? There are a variety of factors that go into mortgage loan approval, and the borrower’s FICO score is just one of those factors. However, your credit report and credit score are an important ones and there can be confusion over how this score is reviewed. What do FHA loan rules tell the lender about FICO scores?
HUD 4000.1 instructs the lender about reviewing credit scores, and since a borrower can have three different FICO scores, this is an important part of the rules to be aware of; how does the lender proceed when reviewing more than one credit score?
Let’s examine what HUD 4000.1 says on this issue, starting with a definition. All three of a borrower’s credit scores may sometimes be the same. In cases like these, FHA loan rules tell the lender:
“The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrowers credit report when all reported scores are the same.” So the lender basically takes that number and compares it to both the FHA minimum required credit score and the lender’s own FICO score standards.
In other cases, the borrower may have more than one FICO score. HUD 4000.1 says, “Where three differing scores are reported, the middle score is the MDCS. Where two differing scores are reported, the MDCS is the lowest score. Where only one score is reported, that score is the MDCS.”
The Minimum Decision Credit Score must be evaluated for all borrowers to be obligated on the mortgage. “Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers. Where the Mortgage involves multiple Borrowers and one or more of the Borrowers do not have a credit score (non-traditional or insufficient credit), the Mortgagee must select the lowest MDCS of the Borrower(s) with credit score(s).”
As you can see, FHA loan rules anticipate a variety of circumstances involving one or multiple borrowers. FHA loan minimum FICO score standards are fairly simple. “The Borrower is not eligible for FHA-insured financing if the MDCS is less than 500.” A borrower is eligible for maximum financing according to FHA minimums when the FICO score is 580 or higher.
However, lender FICO score standards can and often do exceed this FHA minimum, so it is best to discuss your needs with a loan officer to see what is possible at a particular financial institution. FHA loan minimums do not guarantee loan approval a borrower with low or marginal credit scores whether those scores are low/marginal for the FHA or for the lender. A borrower’s other financial qualifications will also factor into loan approval include credit history, loan repayment history, debt-to-income ratios, etc.
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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