September 26, 2017
How does my credit score affect my FHA mortgage loan? There are several areas where FICO scores may affect how much a borrower pays including interest rates, down payment issues, and more.
FHA Loan Credit Score Rules: Two Standards
There are two basic sets of rules and requirements governing borrower credit scores. One set of rules is found in HUD 4000.1, and gives the FHA Single Family Home Loan program minimum requirements for credit scores and how they affect a borrower’s down payment requirements.
The other set of rules and regulations are those of the individual participating lender. Your chosen lender may have higher standards than FHA minimums, and this is permitted by law as long as those higher standards conform to Fair Housing Act policies and other federal regulations.
FICO Scores Affect Your Down Payment
With the understanding that lender requirements for FICO scores may be higher than FHA loan program minimums, the FHA loan ground rules for FICO scores on new purchase home loans includes the following:
-FICO scores 580 or higher are eligible for maximum financing for an FHA home loan, which includes a required down payment of 3.5% of the adjusted value of the property.
-FICO scores between 500 and 579 are technically eligible for FHA new purchase home loans, but with a higher required down payment of 10% of the adjusted price of the home.
-FICO scores below 500 do not qualify for the FHA home loan program.
FICO Scores Affect The Interest Rate A Lender May Offer
FHA loan rules clearly state that the FHA does not set or regulate interest rates on FHA home loans except to require that any rates offered to an FHA loan applicant are reasonable and customary compared to similar home loans offered in that market.
That means the borrower and lender must negotiate the interest rates on an FHA home loan, and your lender will offer an interest rate that is more competitive the better your credit scores are; some credit score ranges (rather than a fixed number) may be eligible for better rates, some credit score ranges will not. Others still will not qualify at all, depending on lender standards.
Credit Scores: An Important Standard But Not The Only One
Credit scores are an important factor in FHA loan approval, but debt-to-income ratios, your history of on-time payments in the 12 months leading up to the home loan, and other factors will also weigh heavily in the lender’s decision to approve or deny an FHA mortgage loan.
Talk to your loan officer if you are unsure how your FICO scores may affect your transaction or the potential for loan approval-especially in relation to your other financial qualifications.
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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