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What FICO Model do Lenders Look at For FHA Loans
From my understanding, there are different types of FICO Models and every creditor uses a certain FICO Scoring Model. What FICO Model do Lenders Look at For FHA Loans? What FICO Model does FHA use? What is the most accurate FICO Score Model?
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4 Replies
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Yes, there are different FICO models, and lenders may use specific models for each type of loan. Here are the FICO models used by lenders for FHA loans:
FICO Models and FHA Loans
Models Used by Lenders:
Different lenders use different versions of the FICO score, depending on what type of credit product they offer. For mortgage loans, including FHA loans, lenders often use FICO models tailored to their needs in mortgage lending.
Model for FHA Loans:
These are some of the most commonly used FICO score models for FHA loans:
- FICO Score 2 (Experian/Fair Isaac Risk Model Version 2).
- FICO Score 4 (TransUnion FICO Risk Score 04).
- FICO Score 5 (Equifax Beacon 5.0).
These models belong to an earlier generation of FICO scores, but they continue to be widely used in the mortgage industry because they have proven effective at predicting mortgage risk.
FHA and FICO Scores
Requirements:
Minimum FICO Score: To qualify for a down payment as low as 3.5%, you’ll typically need a minimum credit score 580 with the Federal Housing Administration. However, if your score is between 500-579, expect lenders to ask for at least ten percent down because finding one willing to work with such low scores can be challenging.
Credit History: Beyond looking at your credit ratings from one bureau alone, like Experian’s or Equifax’s version of “FICO.” These government-backed mortgages also evaluate borrowers’ overall financial past, including payment histories and debt-to-income ratios, which measure how much money people owe against their gross income levels.
Derogatory Credit Tradelines:
Any derogatory marks found, such as late payments over thirty days old but less than ninety days overdue, among others, make sense as to why many applicants might feel overwhelmed when trying to apply on their own without professional help!
Most Accurate Model:
Fico 8: This is the most widely used version across different types of credit products, such as credit cards and auto loans. It’s generally seen as highly accurate for assessing general creditworthiness.
FICO 9: Released to account for certain changes in consumer behavior; includes factors like rental payment history. While increasingly adopted, it has yet to become standard in mortgage lending.
FICO 10 / FICO 10 T: These newer versions look at trended data over time to give a more holistic view of consumer behavior. However, mortgage lenders have yet to widely embrace these models.
Choosing the Right Model
For FHA loans and other types of mortgages, lenders primarily use these FICO models:
- FICO Score 2 (Experian).
- FICO Score 4 (TransUnion).
- FICO Score 5 (Equifax)
Although FICO 8 and FICO 9 are commonly used in other areas of credit applications, such as personal loans or student debt refinancing offers from SoFi, banks still prefer these older methods since they have longer track records of predicting risk for home lending.
FHA Loans: Lenders typically use FICO Score 2, FICO Score 4, and FICO Score 5.
Most Accurate Model: For general use cases where people apply for various forms of credit facilities like car financing or opening new bank accounts with overdrafts, etc., then both FICO eight & nine provide reliable assessments of an individual’s ability to repay borrowings promptly. It also shows instances where rent payments weren’t met but became current over time again. If someone needs them more specialized towards mortgage terms alone, relying on older ones(Mostly HECM) should suffice, too. Given their wide universal adoption rate, even though some might argue otherwise due to lack of widespread awareness hereof nationally, this notion outweighs this notion because historically, it has worked well enough before till now, so why change a good thing?
Credit Score Requirements: FHA requires a minimum score of 580 for a 3.5% down payment, but borrowers with lower scores may still qualify with a larger down payment.
Knowing which FICO model is used can help applicants prepare to apply for a mortgage and work on their credit accordingly.
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What Score Do Mortgage Lenders Use For a Home Loan?
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How are you doing, Randy. Hope everything is well for you and your family. It has been a while. Great question, my man. I appreciate your inquiry about FICO score models and their importance to FHA loans. So, let’s unpack this:
FICO Score Models:
There are many different models for FICO scoring, all with slightly different formulas and score ranges.
The most widely used are FICO Score 8 and FICO Score 9, as well as industry-specific models like FICO Auto Score or FICO Bankcard Score.
FICO Score for FHA Loans:
- Lenders typically use the FICO Score 5 model regarding FHA loans.
- As an older model, it was specified by the Federal Housing Administration (FHA) for qualifying mortgage insurance in its program.
FICO Score Used by FHA:
- When reviewing loan applications, the FHA uses the FICO Score 5 model.
- This ensures that lender-reported scores align with those used during FHA underwriting procedures.
Most Accurate FICO Model:
- No one model can be deemed definitively “more accurate” than any other because they were each created for slightly different purposes.
- However, FICO Score 9 is considered more up-to-date and predictive than anything else available today for general consumer lending.
- Still, when it comes to auto loan applications, at least some people believe that certain industry-specific versions.
- Examples, such as those designed around automobiles, might improve accuracy.
- What matters here, though, is what lenders will use for FHA loans.
- Lenders normally will use the FICO score model number five.
- This has become standard practice within the mortgage field.
- This is even though newer versions could perform more powerfully elsewhere within wider ranges of credit-granting situations.
- It is not just limited to mortgages backed by federal housing administration-insured programs!
If there’s anything else you want to know about FICO scores relative to mortgages or any other form of financing, please feel free to ask.
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Thanks, Gustan. Everything is going good as it could be. Having a hard time in Sarasota, Florida. Very tough real estate market for rentals. I appreciate your answer and it now makes sense. Thanks again.