October 15, 2021
Are you worried about your credit scores for an FHA home loan? When is a low credit score a reflection of bad credit behavior?
FHA home loan rules specify that the lender must ensure a borrower as a 500 FICO score at the very minimum in order to qualify for an FHA mortgage, but your credit score numbers don’t tell the whole story.
It’s true that FHA loan rule minimums for FICO scores do not always reflect the participating lender’s credit score requirements; borrowers are technically eligible for an FHA mortgage with the lowest possible down payment if they are applying with FICO scores at 580 or higher. The lender may require a credit score of 620 or higher for the same applicants.
But your FICO scores only make up one part of the picture the lender is trying to see when reviewing your application. A borrower with a low FICO score doesn’t always have these low scores because of financial mismanagement, late payments, or other problems.
Sometimes the borrower suffers in the FICO score department because of a lack of credit use, or having credit for only a short period of time before applying for a home loan. Some people just prefer to pay cash for their computers, cars, or cell phones. But the lack of credit use can lower your rating.
That does not mean the lender automatically views you as a bad risk for a mortgage loan.
Even if you have made past credit mistakes and your credit record reflects those mistakes, it’s not necessarily the end of your home loan journey when you are waiting for home loan approval.
When you apply for an FHA new purchase home loan, the lender will want to know how much more of a down payment you might be willing to make above the minimum.
A larger down payment can help overcome some credit problems when the lender permits. And there are other factors to consider, too.
If you have “substantial cash reserves” you should let the lender know the nature and amount of such reserves as they could make a difference in loan approval for marginal FICO scores.
This is true because your assets are an important part of your financial picture. A borrower with lower credit scores but more assets, high income consider stable and reliable, and other factors may be surprised at how flexible the participating FHA lender might be-but it all depends on those added factors.
If you have a marginal credit score or are worried that your scores are not high enough, you can improve your chances at getting a home loan approved by making 12 months of on-time payments on your debts before trying to get an FHA home loan.
Avoid opening or applying for new lines of credit, and avoid cancelling your cards or increasing the balances on those cards in the 12 months leading up to your loan.
It is also highly recommended to lower your credit card balances as much as possible and try to save more money for a higher down payment in those 12 months leading up to the application.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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