Custom Lending for Traditional and Manufactured Homes.
Lowest Credit Score Loans and Compensating Factors
Explain how the lowest credit score is used to qualify for an FHA loan, is 500-579
FHA has the most lenient credit program, within the “best rates” lenders category.
Within the lowest credit score ranges, adjustments are made to help the funding lender balance the risk for the low scores.
As the credit scores increase, the underwriting rules loosen up.
Underwriting is based on the middle score of the lowest credit scores of the borrowers.
For instance, if a husband and wife are borrowing the money, and the wife’s scores are lower than the husband’s, the qualifying credit scores will be taken from the wife.
Her middle score will drive the approval.
The 500-579 middle scores, can also be used for a No Credit Score option. The maximum qualifying ratios are 31/43.
This means the borrower can spend 31% of his Gross income on the house and related costs, like taxes and insurance.
Then, his combined payments, including the home, cannot exceed 43% of his gross income. These ratios are easily exceeded.
Once the borrower’s middle score, (decision score), reaches 580 and above, there are no compensating factors required, as long as his debt to income ratios remain at 31/43, or below.
Now, as the ratios raise, so do the requirements:
580 and above, with a 37/47 ratio, the borrowers need to have one of the following:
verified and documented cash Reserves;
minimal increase in housing payment; or
residual income.
The approval will state how much of the above is needed.
580 and above, with a 40/40 ratio, the borrowers may not have any discretionary debt.
580 and above, with a 40/50 ratio, the borrowers need two of the following:
verified and documented cash reserves;
minimal increase in housing payment;
significant additional income, not reflected in their Effective Income; and/or
residual income.
In summary, as your income to debt ratios go up, so do the requirements.
FHA does not want borrowers “living on the edge,” unable to pay maintenance costs for the home or other surprise costs of living.
Please contact me to discuss your specific lending needs, and I will give you the calculations regarding your debt to income numbers.
Authors Notes:
It is often, simply stated, that FHA will make loans with no credit history or with credit scores down to 500.
While this is true, as you read above, there is much more to consider for an FHA Loan Approval, when the credit scores are low.
It is our practice, at Sellens Real Estate Lending, to obtain a tri-merge credit report on all the borrowers, when feasible. This way there is time to address any surprise issues that come up.
The credit report shows it all – the good and the bad, and once received, we can submit the loan to get a pre-approval furnished by the FHA automated underwriter.
Many factors effect your credit scores. An example of this is, if you have a credit line with a maximum amount you can borrow, and you get close to that maximum, your credit score will go down, sometime dramatically.
This is true, even if the credit line is small. Say a $300 limit, and you get close to the $300, or even worse, you exceed the $300 limit. A $50 or $100 payment can change your score in your favor.
At the end of the credit report, you will find phone numbers for each of the credit lines. You can contact them by phone, and explain if there are errors that need to be corrected.
It is best to do all the creditor business in writing. You can offer to pay a credit line down or off, and the creditor needs to write down what they will do for you, if you do something for them.
If you need help understanding your credit report, I will be happy to help.
As the credit scores increase, the underwriting rules loosen up.