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Can a Borrower qualify for FHA with Low FICO Credit Scores
Can a Borrower qualify for FHA with Low FICO Credit Scores?
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Someone who is borrowing can qualify for an FHA loan with low FICO scores. Unlike conventional loans, which make them appealing to borrowers with lower credit scores, the FHA is known for being more flexible on credit score requirements. Here’s what you should know:
FHA Credit Score Requirements:
Minimum Credit Score of 580:
To qualify for an FHA loan, borrowers need a credit score of 580 or higher and a minimum down payment of 3.5%.
Credit Scores Between 500-579:
If a person’s credit score is between 500 and 579, they may still be eligible for an FHA loan but must make at least a 10% down payment.
Credit Scores Below 500:
Usually, but not always, borrowers are not approved for FHA loans if their credit scores are below 500. Nonetheless, there could be some exceptions when this rule can be violated, provided that strong compensating factors exist.
Compensating Factors:
For example, lenders might consider following compensating factors to make a borrower’s application stronger where their credit score is low:
- A bigger down payment.
- Low debt-to-income ratio (DTI).
- Stable employment history.
- Significant cash reserves or savings.
Additional Considerations:
Manual Underwriting:
Suppose you have a manual underwriting process applied to your application because the lender has determined that your credit score is too low. In that case, we will evaluate everything more carefully, such as your financial situation or even compensating factors, which become more important in this case.
Lender Overlays:
While it sets minimum guidelines, each lender could apply additional requirements that are stricter than those minimums, such as overlays. Thus, some may ask for a minimum credit score of at least six hundred and twenty, though HUD allows lower scores according to its guidelines.
Impact of Credit History:
The complete review by the FHA of somebody’s full records about credits, including late payments, collections, and bankruptcies, among others, can make one not qualify for consistent late payments or recent credit issues even with a qualifying FICO score.
An FHA loan might be the best choice for an individual whose FICO is low, especially if compensating factors exist. You should seek advice from lenders experienced in dealing with FHA loans to get enlightened about what you can do and how to raise your chances of getting approved.