December 21, 2017
What credit score do I need to get a home loan? That is a question many FHA loan applicants ask, and the answer involves both FHA loan rules in HUD 4000.1 (the FHA loan handbook) and lender requirements.
What You Should Know About FHA Loan Standards
FHA loan rules for credit and FICO scores are minimum requirements, but your participating FHA lender may have additional requirements. Always remember that FHA loan rules provide the baseline requirements, but the lender may have higher FICO score and credit history standards. What we’re discussing here are the FHA rules, lender requirements will vary.
The FHA “Minimum Decision Credit Score” (MDCS)
HUD 4000.1 defines the FHA MDCS as follows:
“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.”
The FHA loan handbook requires an MDCS for all borrowers to be obligated on the mortgage note. In cases where there is more than one loan applicant for the transaction, “the Mortgagee must determine the MDCS for each Borrower, and then select the lowest MDCS for all Borrowers.”
Furthermore, “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).” Additional lender requirements may apply.
The FHA Minimum Credit Score Requirement
For maximum financing with a minimum required down payment of 3.5%, FHA loan rules require credit scores of 580 or better. HUD 4000.1 allows FHA loan approval for borrowers with FICO scores between 500 and 579, but a 10% down payment is required. FICO scores below 500 are not eligible for FHA mortgage loan approval.
Lender standards can, and often are, higher than the 580 minimum for maximum financing. Borrowers with FICO scores at or near 580 will need to discuss lender standards with the loan officer to see what may be required.
FICO Scores Are Not The Only Credit Standard Used To Approve FHA Loans
Your payment record, especially the payments in the 12 months leading up to the mortgage loan application, is very important. Borrowers should not apply for an FHA mortgage until they have a solid 12 months of on-time payments on all financial obligations. Late or missed payments in the 12 months leading up to the mortgage application can seriously jeopardize loan approval.
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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