Which credit score will my lender use for my home loan? There is understandably some confusion over this issue; there are three major credit reporting agencies, and multiple credit scores possible. How does your lender know which score(s) to use?
When it comes to FHA mortgage loans, the FHA loan handbook has instructions for the lender on how to proceed when evaluating a borrower’s credit scores. One page 132 we learn:
“The Minimum Decision Credit Score (MDCS) refers to the credit score reported on the Borrower’s credit report when all reported scores are the same. 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.”
A Minimum Decision Credit Score is required for all borrowers to be obligated on the FHA loan. According to FHA loan rules, the lender must follow a slightly different procedure when working on a loan that has multiple borrowers:
“An MDCS is determined for each Borrower. Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.”
And what about situations where there are multiple borrowers but at least one of them does not have a credit score? FHA loan rules anticipate such conditions. “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).”
All borrowers who are to be obligated on the FHA mortgage loan are required to credit qualify for the loan. FHA loan minimum standards include a minimum FICO score of 580 to qualify for maximum financing. The lender cannot use one borrower’s higher scores make up for the FICO score shortcomings of a borrower who falls below FHA mortgage loan program minimums.
Instead, the lender may look for compensating factors such as a larger down payment, substantial cash reserves, or other factors permitted in the FHA loan handbook. It’s also important to remember that lender standards may be higher than FHA minimums where FICO scores are concerned-the lender’s requirements must also be satisfied.
Talk to a loan officer if you have any questions about higher FICO score requirements than the FHA loan minimums and how those requirements may affect your transaction.