September 5, 2013
A reader asks, “My husband and I are working on improving our credit, but still have low scores, mine being in the 530s and his in the 640s. Although we’re working on improving it, we aren’t to our ideal score yet…Does anyone have suggestions on lenders that will work with lower credit scores AND a lower down payment? (~5% based on the houses we’ve looked at so far).”
Borrowers who find themselves in situations like these should do one very important thing before going any farther–contact the FHA directly by calling 1-800 CALL FHA and ask for a referral to an FHA-approved housing counselor.
FHA approved housing counselors can offer advice and suggestions for improving creditworthiness before filling out an FHA loan application, and give advice on how to best prepare for the FHA home loan application process.
Many lenders require a minimum credit score of 620 or 640 for home loan approval. The FHA will review the credit data for all applicants on the FHA loan, and past credit performance is considered an indicator of creditworthiness and future repayment ability.
That said, the FHA has developed a program to help borrowers who have experienced past hardship due to the recession who may have negative credit data that does not reflect their current ability to repay an FHA home loan.
Borrowers should get in touch with their loan officer to see if they qualify for this consideration under the new FHA/HUD Back To Work Program. Contact the FHA directly about Back To Work at 1-800 CALL FHA.
With regard to the downpayment portion of the reader question, FHA loan minimum down payment requirements are at 3.5% at the time of this writing. This is the minimum required investment and the borrower should expect to pay this downpayment as a condition of the FHA loan. Borrowers who have credit ratings that are at or just below the lender’s minimum standards, or who have other loan circumstances that “exceed FHA benchmark guidelines” according to Chapter Four Section F may be able to work with a lender by offering to make a larger down payment as a “compensating factor”.
Do you have questions about FHA home loans? Ask us in the comments section
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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