October 2, 2017
Do you know how credit score issues affect your FHA home loan application? For most borrowers, there’s no such thing as a new purchase loan with no credit check; The FHA loan handbook (HUD 4000.1) instructs the lender that credit score checks for FHA mortgage loan applications are mandatory except in certain instances such as for FHA Streamline Refinance loans, and other transactions as described on page 158:
“The Mortgagee must review the credit report to determine the Borrower’s Minimum Decision Credit Score (MDCS), except for Mortgages to be insured under Section 247, Section 248, Streamline Refinances, and Assumptions. The MDCS will be used to determine the maximum insured financing available to a Borrower with traditional credit.”
HUD 4000.1 adds that FHA loan applicants who have non-traditional or insufficient credit histories are “eligible for maximum financing, but must be underwritten using the procedures in Manual Underwriting”.
Manual underwriting may require additional lender scrutiny on credit history, income and other financial qualifications. Borrowers with non-traditional credit may need to provide the lender with more supporting documentation from any source of credit or monthly financial obligations including rent, utilities, etc.
The FHA Minimum Decision Credit Score is described as “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.”
FHA loan rules require the lender to get an MDCS for each Borrower on the application. “Where the Mortgage involves multiple Borrowers, the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.” That can be important if the borrower or borrowers are on the low end of a FICO score range that determine loan approval or how competitive the interest rate on the mortgage might be (see below).
All borrowers must credit qualify-the FICO score shortcomings of one borrower may, depending on circumstances, affect the loan application in general but compensating factors such as the ability to make a larger down payment or having “substantial cash reserves” may offset a marginal credit score. Lender standards will apply so it’s best to discuss such issues with a loan officer to see what is possible at that financial institution.
FICO scores that aren’t high enough for certain lenders may result in being offered a less competitive interest rate. When there are multiple borrowers it may come down to the lender’s requirements rather than FHA loan minimum requirements where interest rate options and down payment amounts are concerned.
Your credit score must be 500 or higher to technically qualify for an FHA loan-according to FHA loan minimum standards. FICO scores between 500 and 579 aren’t eligible for the maximum financing; scores in that range must pay 10% down. FICO scores at 580 or higher are eligible for maximum financing under FHA loan rules. Your lender’s standards may require higher scores than these, with interest rates offered accordingly depending on your scores and those standards.
FICO scores are examined together with other factors including the borrower’s debt, income, any assets or cash reserves, the adjusted value of the home, and the total amount of the proposed mortgage payment including taxes, principal, and interest. FICO scores are a very important part of the total financial “picture” the lender must get from the borrower, but your credit scores aren’t the only factor used to determine creditworthiness.
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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