How Your FICO Score Can Affect an FHA Loan.
, by Rob Kaufman
Just to make sure we're on the same page and you really want to be reading this particular article...
An FHA loan is a home loan guaranteed by the U.S. Federal Housing Administration (FHA). Private lenders like banks and credit unions issue the loans and the FHA provides backing. That means, if you don't repay your loan, the FHA will pay the lender.
If you're interested in an FHA loan or want to know what the requirements are, then you're in the right place. Just continue reading to find out more...
FHA Loan Advantages
FHA loans make it easier for consumers who would typically be turned down for a mortgage to buy a home. The benefits of an FHA loan include:
Small down payment
Easier to use money from gifts toward down payment and closing costs
Low interest rate
Sellers can pay up to 6% of buyer's closing costs
FHA Loan Disadvantages
Yes, there are always trade-offs. In the case of FHA loans, the trade-offs are:
Upfront mortgage insurance of 1.75% of loan amount
Ongoing mortgage insurance premium for the entire loan term
Seller hesitation (fear that the deal won't close)
Specific credit score requirements
The FICO Score You Need
So, after knowing the positives and negatives of an FHA, do you still want to proceed? If the answer is "yes" (or "possibly") there are two important facts you need to know:1
A FICO® Score of at least 580 qualifies you for a 3.5% down payment
Two points of interest from the facts above are that your FICO® Score is used to determine access to an FHA loan and 580 is the number that will determine the amount of your down payment
Therefore, if you don't meet the 580 score, does it pay to put down a larger down payment? Or is it best to use those funds to try to improve your credit score so you can get better loan terms in the future? Something to think about.
However, not all FHA loans are approved (or denied) based on one's credit score alone. If an applicant has a score of 580 yet shows a bad credit history, he or she can still be turned down. For instance, does the applicant: have too many new accounts? Use a large percentage of their available credit (credit utilization)? Have derogatory past events? These can all be considered during the lender's approval process.
The evaluation of an applicant's credit history comes with FHA guidelines which say:
"Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower's credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan ." 2
This helps to emphasize the point that the lower your FICO® Score, the better your credit history should be. According to mortgage data analysis at Ellie Mae, it appears this might be a tough thing to accomplish.
In its July 2017 report, the FICO® Score distribution among all FHA loans (purchase and refinance) are as follows: 3
80% of borrowers had FICO® Scores of 600 or higher
12.83% of borrowers had FICO® Scores between 550 and 599
5.74% of borrowers had FICO® Scores between 500 and 549
So, although FHA loans are available to consumers with lower credit scores, one's credit history pays a big part in the final decision. That's a good thing to keep in mind when deciding whether or not to apply for an FHA loan.
What FHA loan stories do other myFICO customers have to share? Check out the myFICO forum and see their experiences... or share your own!