FHA Loans and FICO Scores
In cases like these it is important to distinguish between FHA minimum standards and participating lender requirements. Participating FHA lenders may have higher standards than FHA loan minimums, and this is permitted as long as those standards are applied in accordance with the law.
Why is that an important thing to remember? Because depending on your FICO scores, you may be eligible for more competitive interest rates and lower down payments than applicants who come to the FHA loan process what might be considered “marginal” credit scores.
If you are concerned about your FICO scores, it’s a very good idea to check your credit reports as early as possible in your planning stages for the home loan. You may be able to adapt credit-related “best practices” to help make you a more attractive FHA loan applicant, but it takes time to work on your credit habits and establish patterns of reliability.
Lender standards will determine what interest rates are available for a certain range of credit scores, and which applicants may be required to make higher down payments because of those “marginal” scores.
Under the rules found in HUD 4000.1, the FHA single family home loan rule book for both new purchase and refinance loans, borrowers with credit scores at 580 or higher are technically eligible for maximum financing for FHA home loans.
These borrowers will be required to make a minimum cash investment- a 3.5% down payment from the borrower. For those with credit scores between 579 and 500, 10% down is required according to HUD 4000.1.
You read that correctly-FICO scores between 500 and 579 may technically qualify for an FHA loan at the higher down payment requirement mentioned above. But many lenders will require FICO scores in the mid-600s. The “500-579 rule” is only an FHA minimum.
This can be a source of confusion over how the FHA loan process works-some mistakenly believe that if it’s written down in the FHA loan rulebook, the rule must be enforced. Lender standards, state law, or other factors may have a say in how the transaction is to be carried out in addition to these minimums.
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