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Credit Score Rules For FHA Mortgages

mortgage loan and business debtThere’s a common reader question about credit score rules for FHA mortgage loans that we get from time to time that goes something like this: “Is it possible to have a low credit score (500-600) and still get an FHA mortgage?”

FHA loan rules state that borrowers with credit scores at 580 or higher are eligible for maximum financing for FHA home loans, which requires a 3.5% down payment from the borrower. For those with credit scores between 579 and 500, 10% down is required.

However, these FICO score numbers are FHA loan minimum standards and lender requirements can be and often are higher.

Credit score rules for FHA loans include the following instructions (see below) to the lender found in HUD 4000.1, the FHA single-family mortgage loan rule book. These instructions to the lender can help give borrowers a very good idea of what the lender will look for in your credit report:

“The Mortgagee must obtain a credit report for each Borrower who will be obligated on the mortgage Note. The Mortgagee may obtain a joint report for individuals with joint accounts.” Additionally, “The Mortgagee must obtain a credit report for a non-borrowing spouse who resides in a community property state, or if the subject Property is located in a community property state.”

All borrowers will have a credit review, and the deficiencies of one borrower may be a factor in a loan approval decision. What does your lender need to see when reviewing the credit report? It’s not just about FICO scores. HUD 4000.1 says there is a lot more information that will need to be reviewed aside from scores.

“The credit report must also include:

-all inquiries made within the last 90 Days
-all credit and legal information not considered obsolete under the Fair Credit Reporting Act (FCRA), including information for the last seven years regarding bankruptcies, judgments, lawsuits, foreclosures, (and) tax liens.”

For each borrower’s debt record, the lender will need to see:

-the date the account was opened o high credit amount
-required payment amount
-unpaid balance
-payment history

It’s easy to tell from these quotes from the FHA loan rule book that your lender will be taking an in-depth look at your credit report to look for patterns of behavior that indicate a good credit risk. When it comes to credit scores, your FICO score is definitely an important measure of your ability to manage your credit, but the lender can’t rely on FICO scores alone to make the determination for loan approval.

4 Responses to Credit Score Rules For FHA Mortgages

  1. Jennifer says:

    So you’ll saying i can buy a FHA or HUD at a credit score from 500 to 579? With 10% down? How much is 10%?

    • Staff Writer says:

      FHA loan minimum standards permit purchases with credit scores between 500 and 579 with 10% down of the adjusted price of the home, but lender standards will also apply and you may find that many lenders require FICO scores in the mid-600s.

  2. Jose says:

    Hello – Can a Judgment on credit be ruled out by Lenders/Banks? One broker is requiring to pay off judgment on credit while other is NOT. Trying to understand the different approaches from both Brokers and any information will be greatly appreciated it! Thank you much in advance.

    • Staff Writer says:

      Lender standards would apply so it’s true that one financial institution may require something that another does not. FHA loan rules in HUD 4000.1 on page 174 state:

      “The Mortgagee must verify that court-ordered Judgments are resolved or paid off prior to or at closing…A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments and the Judgment will not supersede the FHA-insured mortgage lien. The Borrower cannot prepay scheduled payments in order to meet the required minimum of three months of payments.”

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