Can You Get FHA Mortgages With Your Credit Score?

Gartmore House -- FHA MortgagesIt’s never been easy to raise a down payment for FHA mortgages and this year is no different.

The usual ways to get the money needed to buy a home have been to (1) get help from Mom and Dad; (2) eat hot dogs for six years and live like a hermit; (3) land a job in Silicon Valley or – and here’s the big one – (4) look for loans with little down.

For most borrowers FHA financing is the way to go – but only if you qualify.

In its latest quarterly report to Congress, HUD said it insured 1,116,214 mortgages in fiscal 2015 – that’s up from 786,354 loans in fiscal 2014. Why the big jump? Simple. The FHA lowered its annual mortgage insurance premium from 1.35 percent to .85 percent, a half percent reduction.

3.5% Down With FHA Mortgages

Long the stand-by of first-time buyers and those not named in the wills of the rich and famous, FHA loans are available with just 3.5 percent down. Most borrowers will qualify for FHA financing with little down but some may need 10 percent up-front and a few may not qualify at all.

To tell where you stand you need to look at your Minimum Decision Credit Score (MDCS).

If your MDCS is less than 500 forget it, you can’t get FHA financing. Then again, if your credit score is below 500 it’s unlikely that buying a house is your top economic priority.

If your MDCS is between 500 and 579 you can get an FHA loan but only with 10 percent down. At the end of fiscal 2015 just 0.2 percent of all FHA loans had credit scores below 580.

The FHA knows that very few people with such low credit scores will have 10 percent and that’s the reason for the standard: It doesn’t want to endorse high-risk mortgages – remember, the FHA does not make loans, it insures them. If something goes wrong it’s the FHA which must pay lender claims for any shortages.

If the MDCS is at or above 580 then congratulations, you get FHA financing with just 3.5 percent down. Given that the average FHA credit score at the end of fiscal 2015 was 682 the odds are with you.

FHA Mortgages & Multiple Credit Scores

But – and I hate to mention this – there’s a catch. There are three major credit reporting agencies. What if one or more of your credit scores is below 580?

  • If all three credit scores are about 580 you’re fine.
  • If the lender pulls two credit scores it must go with the lowest one.
  • If the lender uses three credit scores then the middle score is used to determine your eligibility.

FHA Mortgages & Gifts

A second catch concerns that down payment money.

If it comes from your savings that’s fine. If it comes in whole or in part in the form of a gift from a dearly beloved parent or other relative, that’s okay with a suitable gift letter. If it comes from an employer, good buddy or a local or state housing program that too will work.

However, if any down payment money comes from a seller or a broker in the transaction that won’t work with the FHA mortgages. Such “help” is simply not allowed.


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