September
11
,
2021
What does your loan officer need to do in order to determine whether to approve or deny your mortgage loan? It's not just your credit score, although that plays a very important part in the process. Your free credit reports contain much more information than just FICO score numbers.
FHA loan rules provide clear instructions for the lender when it comes to verifying your ability to afford a home loan. Lenders look at the credit reports in your name at the three major credit reporting agencies; TransUnion, Equifax, and Experian.
You can get a jump start on the process by pulling your own credit reports early and seeing what your lender will learn about you from them. What will your lender learn about your credit accounts and how you use them?
No matter what type of mortgage you seek--an FHA condo loan, an FHA mobile home loan, or if you want to build a house on your own lot using the FHA One-Time Close construction loan, the requirements in the FHA Lender’s Handbook are identical in some ways. Some loans have additional requirements (whether from the lender or from the FHA) but in general:
- There are minimum FICO score requirements (580 or better to meet FHA minimum requirements for maximum financing).
- There are instructions for the lender's review of the borrower’s record on-time payments (12 months of reliable payments on all financial obligations is strongly recommended).
- There are requirements for the borrower to have stable and reliable employment that is likely to continue.
- The FHA loan requires the borrower to have verifiable income. Not all income types are verifiable.
And what about issues the credit bureaus report on such as bankruptcies, judgments, and collection actions? Bankruptcies and judgments have special requirements and your lender will review those on a case-by-case basis.
And In the case of collections, HUD 4000.1, the FHA Lender's Handbook, has instructions to the lender on how to interpret collection accounts.
There are also instructions on the next steps in cases where those collections fall within the lender’s ability to approve the mortgage application; your credit history will be an important factor in loan approval.
HUD 4000.1 page 183 begins by defining what it views as a “collections account”:
“A Collection Account refers to a Borrower's loan or debt that has been submitted to a collection agency by a creditor.” In cases where such an account is present the lender is instructed as follows:
“If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:
- Verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
- Verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrowers Debt To Income (DTI); or
- If a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrowers DTI.”
In these situations where information about collections accounts is a factor your lender is required to provide the following:
- Evidence of payment in full, if paid prior to settlement;
- The payoff statement, if paid at settlement; or
- The payment arrangement with creditor, if not paid prior to or at settlement.
If your lender uses five percent of the outstanding balance, no documentation is required according to HUD 4000.1. Your ability to qualify for new credit in these circ*mstances may also depend on the lender's additional requirements or "overlays".
If you aren’t sure how these rules may apply in your situation, discuss your needs or concerns with a loan officer to see what that financial institution may require in such cases. Remember, payment history, how close you get to your credit limit on your accounts, and the types of credit you carry can all play a part in the lender's review of your credit. Numbers count, but your other personal information (how you use your credit, how close you are to the limits on your accounts, etc.) are also important factors.
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FAQs
FHA loan rules provide clear instructions for the lender when it comes to verifying your ability to afford a home loan. Lenders look at the credit reports in your name at the three major credit reporting agencies; TransUnion, Equifax, and Experian.
How many lines of credit are needed for an FHA loan? ›
The FHA usually requires two lines of credit for qualifying applicants. If you don't have a sufficient credit history, you can try to qualify through a substitute form.
Why do lenders look at credit reports responses? ›
Along with many other pieces of information, potential lenders, and creditors – including credit card companies, mortgage lenders and auto lenders – may use your credit scores and credit history to help make lending decisions. These companies want to know how likely you are to pay the money they lend back as agreed.
What is the minimum tradeline for a FHA loan? ›
With a risky payment history, the bank will look at a total evaluation to determine the likely hood you will repeat or default on the new loan. Most lenders will have a 2 tradeline requirement minimum to qualify for an FHA Loan.
What will disqualify you from an FHA loan? ›
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What is the lowest credit score FHA will accept? ›
Credit score: While the FHA has set the minimum credit score at 500, many FHA-approved lenders require higher minimum FICO scores of at least 620. Down payment: While obtaining an FHA loan requires you to make a down payment, that payment doesn't necessarily have to come from your savings account.
What credit score is needed to buy a $300K house? ›
What credit score is needed to buy a $300K house? The required credit score to buy a $300K house typically ranges from 580 to 720 or higher, depending on the type of loan. For an FHA loan, the minimum credit score is usually around 580.
What is the minimum credit score to buy a house? ›
For a conventional mortgage in California, you typically need a minimum score of at least 600. If you qualify for certain government-backed loans, however, you may be able to buy a home with a score as low as 500.
What is the highest FHA loan limit? ›
That means the FHA loan limit is $498,257 in low-cost areas and $1,149,825 in high-cost areas. The FHA is also required by law to set the loan limit at 115 percent of the median home sale price, subject to the national floor and ceiling.
Which credit report do lenders look at most? ›
For the majority of lending decisions most lenders use your FICO score. Calculated by the data analytics company Fair Isaac Corporation, it's based on data from credit reports about your payment history, credit mix, length of credit history and other criteria.
Your race, color, religion, national origin, sex and marital status. US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act.
Which FICO Score do mortgage lenders use? ›
The most commonly used FICO Score in the mortgage-lending industry is the FICO Score 5. According to FICO, the majority of lenders pull credit histories from all three major credit reporting agencies as they evaluate mortgage applications. Mortgage lenders may also use FICO Score 2 or FICO Score 4 in their decisions.
What is the FHA 75% rule? ›
FHA Rule 75 states that 75% of the rental income must exceed the monthly mortgage for the property to be self-sufficient.
What would cause a house to fail an FHA inspection? ›
The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
Can I get an FHA loan with delinquent accounts? ›
Based on FHA requirements, those who have a good credit history demonstrated by a solid track record of timely payments will likely be eligible for a loan. Potential borrowers whose credit history is marred by slow payments, poor financial judgment and delinquent accounts is not a good candidate for loan approval.
Do home loans look at TransUnion or Equifax? ›
When you are applying for a mortgage to buy a home, lenders will typically look at all of your credit history reports from the three major credit bureaus – Experian, Equifax, and TransUnion. In most cases, mortgage lenders will look at your FICO score. There are different FICO scoring models.
Which FICO score is used for mortgages? ›
The most commonly used FICO Score in the mortgage-lending industry is the FICO Score 5. According to FICO, the majority of lenders pull credit histories from all three major credit reporting agencies as they evaluate mortgage applications. Mortgage lenders may also use FICO Score 2 or FICO Score 4 in their decisions.
Can I get an FHA loan with a 520 credit score? ›
FHA loans accept applicants with credit scores as low as 500. Applicants with scores between 500 and 579 need a 10% down payment. Borrowers with low or bad credit may pay higher mortgage interest rates, but FHA loan rate increases are typically lower than conventional loans.
