Fha credit score limits
Loans insured by the Federal Housing Administration (FHA) have more flexible credit criteria than conventional, non-government guaranteed loans. The FHA began providing an alternative to stringent home loans in 1934, and it continues to help borrowers with credit challenges to obtain financing by promising to repay lenders if borrowers default. The borrower, co-borrower and co-signer on a FHA loan must meet minimum credit score requirements to qualify.
FHA-approved lenders adhere to specific credit guidelines outlined in the U.S. Department of Housing and Urban Development (HUD) Handbook. They consider borrower credit history among one of the four major factors influencing a borrower`s ability to repay a home loan. A credit score and report reveals excessive credit obligations and any past failure to repay debts. A low credit score, delinquent and past due accounts, bankruptcy, and foreclosure are all red flags for lenders. The lender also considers income, assets and other liabilities to determine whether the borrower is likely to repay the loan.
FHA has a minimum credit requirement but not a maximum credit limit. The highest possible credit score based on the most popular credit scoring system, FICO, is 850, and the lowest is 300. FHA requires borrowers to have a minimum 500 FICO score to obtain insurance. Such borrowers must contribute at least a 10 percent down payment. A borrower with a score of 580 or more qualifies for a loan with only a 3.5 percent down payment.
FHA`s minimum score requirements benefit borrowers who have sufficient income and assets to repay a home loan debt but who would be denied under conventional lending standards because of bad credit. FHA insurance allows lenders to make loans to otherwise ineligible borrowers because they are guaranteed repayment of the debt. FHA loans involve an annual mortgage insurance premium which the borrower pays monthly. The increased down payment requirement for borrowers with very bad credit offsets risk for FHA and the lender.
Improve your credit score before applying for a FHA loan by removing inaccuracies and unpaid collections from your report. Such items affect the quality of your loan, specifically the interest rate and your loan limit. A score below 580 requires more money out-of-pocket at closing and a higher monthly payment over the repayment term. By eliminating negative accounts and high-balance credit accounts, you also improve the maximum loan amount. The lender counts fewer monthly obligations, increasing the amount you can put toward a housing payment.
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