CREDIT SCORE BELOW 620

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CREDIT SCORE BELOW 620?

A few known lenders do remain, for credit scores under 620, offering FHA insured mortgages.

For emergencies or urgently required service, please call:
1-631-486-3735 to reach a mortgage specialist "on call".

Why credit scores below 620 are having approval difficulty with FHA.

For many years, the 620 credit score held up as the "at least" qualification for conforming mortgages.  Throughout our 3 year mortgage industry recession, many FHA lenders adopted 620 credit scores as the new requirement for FHA purchase money mortgages and refinance programs; now of course bumped up to a 640 requirement.

A commonly unrealized fact is that FHA insures mortgages. They do not however actually fund the loan. These loans are not financed with government money. Lenders are approved by FHA to do business with the FHA. Nevertheless, these lenders must utilize or source their own investment funds to actually make these loans.

Most lenders, because of this, are restricted to the underwriting requirements that are attributed to the source from which the funds are actually derived. Since it is usually a third party; a Wall Street type source or other large institutional investor sourcing the money, underwriting guidelines are determined by needs of such source. Moreover needs for marketability of a securitization.

One would think that Wall Street is actually in control of this. However, since the mortgage industry imploded as a result of the failure of subprime mortgages, decisions are being made "out of control", rather "in control". It is a combination of direct and in-direct government control and market environment controlling Wall Street; and the banking industry in general. As such, there are now tightened up requirements for "income and credit challenged" borrowers when it comes to all financing; not only FHA/government insured mortgages.

FHA does not actually implement a minimum credit score requirement anywhere in their underwriting guidelines. However, the sources from where mortgage investment money is derived are instituting 620 credit score guidelines; perhaps more for what they think are survival purposes than anything else.

The situation has become ever more complicated. New guidelines and compliance issues placed by federal and state governments nationwide must be adhered to. The lenders accepting FHA insured mortgages with credit scores under 620, must pay particular attention to the housing payment history of their applicants. Whether renting or currently paying a mortgage, there is now little tolerance if any for any housing payment that has been made 30 days late or more within the past year. There are actually a few FHA approved lenders accepting scores below 600. There is one remaining that can accept a credit score down to 500. In the few cases seen, a score of 500 is required for a refinance and a credit score of at least 531 is required for a purchase.

FHA insured mortgages seem to have become more popular in today's market.  There are several reasons for this.

Although these mortgages have not replaced many of the programs lost with the fall of the subprime market, FHA insured mortgages are provided quality financing for many people whom might have otherwise become prey from the less desirable subprime interest rates and pricing.

FHA guidelines and requirements are different from the many of the former subprime programs in that:

1)      First and foremost, FHA insured mortgages provide low interest rates for many folks with less than perfect credit.  This loans are usually provided with a 30 year fixed rate mortgage.

2)      FHA insured mortgages can provide 96.5% financing for folks trying to purchase a home.  Negotiate a sellers concession to pay toward closing costs (up to 6% of the purchase price), and borrowers with challenged credit can often find themselves purchasing their dream home for as little as 3.5% down.

3)      FHA's primary concern seems to be housing payment history.  If your mortgage and/or rent has been paid on time for the past 12 months, you are usually off to a good start in the underwriting process.  However, the are other criteria to meet.

4)      Credit score is not supposed matter per FHA guidelines so credit score below 620, 600 or even 580, should not matter.  However much of the private sector money that actually funds FHA insured mortgages often puts minimum credit scores before other qualifying requirements.  As such, finding the right lender will be key if your credit score falls under 580, 600, or even 620.

5)      Income must always be provable and real.  IRS form 4506 is required to be signed.  As well the IRS form 4506 is processed on virtually every FHA insurance loan underwritten.  Transcripts from the IRS are pulled on just about every FHA insured file to confirm borrower income and actual income tax filings for the past 2 years.

6)      Self employed borrowers are also required to provide a YTD P&L Statement (year to date profit and loss) prepared by a verifiable CPA.

7)      Debt to Income ratios are usually strictly set at 43% back end, with FHA compensating factors making allowances up to 46% if reserves can be provided.

8)      If previous mortgage payment history is perfect and LTV is low, (less than 65%), sometimes stable income will qualify for 50% DTI on an FHA insurance refinance.

9)      Non-occupying co-borrowers, in effect acting as FHA co-signers can often be added to the loan to improve debt ratio on borrowers that are in the 55% DTI range without the co-signer/co-borrower.

10)  Stated income, "no-ratio" and/or "no income check" mortgages are strictly forbidden on any FHA insured mortgage.


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Last Update 04-14-2017