It could be that the person is contemplating to purchase a house that he can call his very own. Probably, he might be wondering what the minimum credit score for FHA loan is. Searching through the web can leave the person to be more confused, while the HUD’s official site can leave his head spinning.
Understanding the minimum credit score for FHA loan
FHA (Federal Housing Administration) states that the minimum credit score that is required to have by the FHA loan applicant is 500. However, for those who are credit challenged, it can be a real tough task. Horrible credit scores are acceptable to the FHA, however, not the applicant having horrible credit. According to the FHA, applicants having significant income for supporting obligations, experiencing slow payments, delinquencies, and judgments, for loan approval, it would take into account a few crucial compensating aspects. It has been noticed that approvals ranging around one-quarter of a percent are provided to borrowers having credit scores between 500 and 579.
500 to 579 credit score is sufficient for being eligible for the FHA loan. However, it is essential for the borrower to come up with 10% down payment of the value of the home. Although this percentage is seen to be low for those applying for non-FHA loans, the home buyers may still find it to be a quite a high threshold. Even if the person tries to put up this down payment of 10%, finding a lender, who actually would be interested to approve home loans with low credit scores can be tough.
About minimum 580 minimum credit score
FHA allows a minimum credit score of 580 for providing loans with just 3.5% down payments. But trying to find such mortgage lenders eager to take this risk is quite severe. In case, a lender is found to be interested in providing loans with a low credit score of actually what is being allowed; then additional requirements may be required by the lender, such as higher rates of interest or huge down payments, which beyond and above the guidelines of the FHA. Such additional have been termed as ‘lender overlays’.
What is Lender Overlays?
Majority of the lenders are known to have own limits established for credit scores from 620 to 640 and up to 680, a practice known as lender overlay. Although the guidelines of the FHA could be quite flexible, the lenders who are FHA approved are allowed to have additional requirements overlay before the home loan is approved.
Credit scores for FHA borrowers have been rising steadily in the last couple of years. Right from 621 average noticed in 2008, this average increased to about 700 in 2012. It does not mean that the person having poor credit has to be disappointed. The reason is that even among the FHA approved lenders; there is no uniformity in mortgage requirements. In case, the person is eager to know how the ability to derive an FHA loan would be impacted by his credit score; then he should immediately start contacting the lenders, get to know their minimum credit score requirements, check and compare their loan terms and make a well informed, wise decision.