Lots of people want to know what credit issues will affect the approval of FHA loans. The shortest answer is that it’s a combination of FICO scores, your repayment habits on all financial obligations (not just credit cards or revolving debt), and the amount of debt you pay on each month versus how much income you have.
But there are some hard numbers to look at, too. FHA minimum requirements for credit include FICO score requirements for maximum financing. If your FICO scores are 580 or above you technically qualify for maximum financing, which means only a 3.5% down payment. But FHA FICO minimums are not the only FICO score requirements you’ll need to meet.
Credit requirements at your chosen lender can be, and often are, higher. You may find FICO score requirements in the mid-600s to be the norm when applying for a single family “forward mortgage” or new home purchase. Borrowers who have credit a lender considers to be marginal or pushing the acceptable boundaries for loan approval may be asked to consider making a higher down payment-or required to do so as a condition of loan approval.
The amount of debt you have versus the amount of income you earn will also be an important factor. However, some items are not considered debt according to the FHA loan handbook, HUD 4000.1. Those items include utilities, child care, certain taxes, even medical collections. Additional lender standards may apply in addition to the rules found in HUD 4000.1 in this area, and state law may also have a say in how such issues are handled by the loan officer.
If you are concerned about your ability to credit qualify for an FHA mortgage, it may be a very good idea to contact the FHA directly at their toll-free number (1-800 CALL FHA) to request a referral to a local, HUD-approved housing counselor who can talk you through issues like credit, preparing for the loan application, and what standards to expect (in general).
Preparing for an FHA loan-including reviewing your credit reports and making other preparations such as reducing your debt-to-income ratio-takes time. It’s best to give yourself at least 12 months in advance to review and prepare for filling out your FHA loan application. That way you know what your lender will see on your credit report, have time to establish solid repayment history on all debt, and dispute any evidence of errors or identity fraud on your credit report.