February 16, 2017
There’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.
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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