April 24, 2023
FICO scores play an important part in any home loan application. There is often confusion about FICO scores, with some applicants assuming that only FICO scores determine loan approval, while others wrongly assume they only have one credit score.
What’s the reality?
There are three major credit reporting agencies; Equifax, TransUnion, Experian. A borrower may actually have three different scores and the information on one credit report may not be the same on the others, depending on circumstances.
That is one reason why lenders encourage borrowers to check their credit reports as early as possible before applying for an FHA mortgage.
One credit report could have discrepancies another does not reflect, etc. A borrower should always know what the lender will see on the report before completing the application.
FICO scores are an important part of FHA loan approval but aren’t the only factor. Your loan repayment history (and your record of paying all financial obligations in the 12 months following the new loan application) are as important as FICO scores.
FICO scores are crucial in one critical area aside from basic loan approval. Your down payment amount can be determined by your FICO score.
What does that mean? In simple terms, the FHA single-family home loan program has a set of FICO scores that allows a borrower to qualify for FHA maximum financing (which includes a required 3.5% down payment). Applicants with FICO scores of 580 or better technically qualify for maximum financing.
Borrowers with FICO scores below 580, but not lower than 500, are technically qualified for an FHA loan but must provide a minimum of 10% down.
While the FICO scores mentioned above may qualify according to FHA standards, lender standards may also apply. You may find lenders requiring higher FICO scores (620 to 640 in many cases) for loan approval. Down payment standards may also be affected by lender rules.
It’s imperative to do two things in the planning stages of your FHA home loan application. Find out what your FICO scores are from the three major credit reporting agencies, and also learn what your chosen lender or potential lender will require in terms of FICO scores.
Knowing both of these things will help you learn what may be required to happen next.
Borrowers who need to improve FICO scores can take steps to improve their credit. Those who feel a given lender’s standards may or may not be reasonable can continue shopping for a participating lender.
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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