CREDIT SCORE BELOW 620?

Why a credit score below 620 often does not qualify for an FHA loan.

Traditionally a 620 credit score was the standard for qualifying for a conforming mortgage.  However, today, most FHA lenders seem to have adopted this 620 score requirement into their FHA guidelines.

Nevertheless, there are lenders providing FHA insured mortgages with credit scores under 620.

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There is a common misconception about how the financing of an FHA loan actually works.  Most people think that the government is actually lending them the money.  Although the lender must be approved by the federal government to make FHA loans, the government is actually only insuring the loan.  It is the lender that must  provide the funds for the loan.

As such, most lenders are subject to the guidelines that are placed on them by the investor source providing the money.

Wall Street seems to be controlling much of this.  Since the fall of the subprime market, mortgage back securities and their decision makers have adopted much stricter guidelines for financing "credit challenged" borrowers; even for FHA insured financing. 

HUD does not reference any credit score requirement for approving financing for an FHA insured mortgage.  Again it is the money sources and/or investors providing funds for the lenders that is placing these 620 credit score requirements on the system.

There are lenders providing FHA insured mortgages with credit scores under 620.  Some FHA approved lenders will go below 600.  There are a very select few that will approve borrowers with credit scores of 500 and up.  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.