April 17, 2017
How do FICO scores affect your FHA home loan application? A reader got in touch this week to ask a question in this area:
“Hello, my credit score is between high 500s, low 600s. I make $8,000 a month. My mother in law said she would co-sign for my wife and I, her score is near perfect. Is this situation possible to get a loan for a home? She manages an apartment complex and pays no rent. Thanks for your time.”
FHA loan rules in HUD 4000.1 state that a borrower is technically qualified for maximum financing (with a required minimum 3.5% down payment) with FICO scores at 580 or higher. Borrowers with FICO scores between 500 and 579 are technically eligible for FHA loans with a 10% minimum required down payment.
However, these minimums do not reflect lender standards, which can and often are higher. What’s more, FHA loan rules state that FICO scores are not the only measure of a borrower’s creditworthiness.
A borrower with at least 12 months of on-time payments on ALL financial obligations leading up to the loan application has a much better chance at FHA loan approval. It is best to plan your FHA loan application so that when you fill out the forms, you have the 12 months minimum on-time payments on your credit history.
FHA requirements in HUD 4000.1 state all who are to be obligated on the mortgage to credit qualify. A lower FICO score is not always a barrier to loan approval if there are what the FHA loan rule book describes as “compensating factors” such as a larger down payment, substantial cash reserves, etc. that could help a borrower who is “borderline” with regard to the lender’s FICO score requirements. However, these factors cannot offset derogatory credit information.
Finally, with regard to the reader’s specific questions about co-borrowing or co-signing, the laws of the state the home is to be purchased in will play an important role in how such transactions are to be carried out. That’s especially relevant in community property states, where state law has a say in how the debts incurred in a legal marriage are handled.
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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