FHA Home Loans

Minimum Credit Scores To Qualify For FHA Loans For Home Buyers

ByGustan Cho
This BLOG On The Minimum Credit Scores To Qualify For FHA Loans For Home Buyers Was PUBLISHED On July 16th, 2019 HUD Mortgage Guidelines On Minimum Credit Scores To Qualify For FHA Loans Minimum Credit Scores To Qualify For FHA Loans depends on the amount of down payment the home buyer has.
  • The U.S. Department of Housing and Urban Development, HUD, is the parent of the Federal Housing Administration or FHA
  • FHA is not a mortgage lender and has nothing to do with funding FHA Loans
  • FHA’s role is to insure FHA Loans mortgage companies that follow FHA Guidelines
  • Many consumers are confused as of the function of FHA
  • Many ask what does it mean that HUD does not originate nor fund FHA Loans and just insures them?
  • Well, most mortgage companies view the down payment a borrower puts down on a home purchase, the more skin in the game the borrower has
  • The more the down payment the borrower puts down on a home purchase, the less likely the borrower will default on their home loan
In this article, we will discuss and cover the Minimum Credit Scores To Qualify For FHA Loans For Home Buyers.

Down Payment Borrowers Put Down Versus Risk Level By Lenders

Therefore, the more down payment a homebuyer puts down on a home purchase or the lower the loan to value a homeowner has on his mortgage loan, the less the risk the lender has:
  • The more down payment a homebuyer puts down, the lower the mortgage interest rates will be
  • However, HUD only requires a 3.5% down payment for homebuyers who meet the minimum credit scores to qualify for FHA Loan requirements of 580 FICO
  • Homebuyers with credit scores of under 580 credit scores require 10% down payment
  • Borrowers can qualify for an FHA Loan with credit scores as low as 500 FICO
  • This holds true as long as you have 10% down payment with strong compensating factors and substantial reserves
  • HUD insures HUD-approved lenders in the event borrower defaults on their FHA Loans
  • So the skin in the game theory where the borrower gets a lower mortgage interest rate if they put a larger amount of down payment on a home purchase no longer exists due to the government guarantee by HUD
  • Since HUD insures the FHA Loan against the default of the borrower, FHA Loans offer real low mortgage rates for borrowers
FHA rates are substantially lower than Conventional mortgage rates due to FHA Loans being insured by FHA.

Why Do Lenders Have Different Minimum Credit Score Requirements?

Why do mortgage lenders have different credits scores to qualify for FHA Loans?
  • FHA has a minimum credit score requirement of 580 FICO for home buyers that want to put 3.5% down payment on a home purchase
  • However, many borrowers feel discouraged because they visit banks lenders to find out what their minimum credit score requirements are substantially higher than the 580 credit scores required by FHA
Not all lenders have the same FHA Lending Requirements. All lenders need to meet the minimum HUD Mortgage Agency Guidelines. However, lenders can have higher lending standards that are above and beyond of HUD Agency Requirements.

HUD Agency Guidelines Versus Lender Overlays

It is not unusual for most banks to require a minimum credit score requirement of 640 FICO:
  • Most lenders will have a 620 minimum credit score requirement
  • This holds true even though FHA only requires a 580 credit score
  • This higher requirement mandated by banks and mortgage companies is called an FHA Lender Overlay on credit scores where their requirements are higher than those of HUD
  • There are many FHA Lender Overlays that lenders can impose besides credit scores
  • Banks can require lower debt to income ratios to be lower than those required by FHA
  • FHA will allow up to a 56.9% DTI for borrowers who have at least a 620 credit score
  • But most mortgage companies can cap debt to income ratios up to 45% DTI or 50% DTI
  • Some may go as high as 55% DTI
If you need to stretch the debt to income ratios up to 56.9% DTI, you need an FHA mortgage lender that has no lender overlays like myself where I am Fannie Mae direct and have no overlays and will just go off the AUS Findings (Automated Underwriting System).

Credit Scores Versus Debt To Income Ratios

Minimum credit scores to qualify for FHA Loans is 580 FICO for 3.5% down payment home purchases:
  • Those with credit scores of under 580 FICO, there is a 10% down payment requirement on a home purchase
  • With FHA Loans, there is the debt to income ratio requirements on credit score of under 620 FICO
  • The highest debt to income ratios allowed for borrowers with under 620 credit scores is capped at 43% DTI
  • Borrowers with credit scores of 620 FICO or higher, the maximum debt to income ratio allowed is 56.9% DTI
  • Borrowers who have a higher debt to income ratios with lower credit scores may need to strive to boost their credit scores north of 620 credit scores
  • There are some quick fixes to boost one’s credit scores
  • Paying down credit card balances will definitely increase credit scores
  • A maxed-out credit card will definitely lower a consumer’s credit scores
  • Having under a 20% credit balance to credit limit utilization ratio will maximize a consumer’s credit scores
  • Not having any revolving credit is not good for credit scores
  • Not having any active credit accounts is not good for your credit nor credit scores
If you have no credit tradelines, get a few secured credit cards or add yourself on to someone’s credit card account as an authorized user and your credit scores should significantly increase.

Credit Scores Versus Credit Payment History

Just because you meet the minimum credit scores to qualify for FHA Loans does not mean that you are guaranteed an FHA Loan.
  • If you meet the minimum credit scores to qualify for FHA Loans, which is 580 FICO, the lender will look at your overall payment history
  • Lenders do not want to see any late payments in the past 12 months
  • You can have prior bad credit, open outstanding unpaid collection accounts and charge off accounts and do not have to pay outstanding collection accounts to qualify for FHA Loans
  • However, most lenders will want to see timely payments for the past 12 months
  • One or two late payments in the past 12 months is not a deal killer but should be avoided at all costs
If you have credit scores under 620 FICO credit scores and are looking for an FHA Lender with no FHA Lender Overlays, please contact me at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates Mortgage Group are available 7 days a week, evenings, weekends, and holidays. My loan officers are licensed in most of the 50 states so we will be able to help anyone needing a mortgage lender with no lender overlays.