FHA revised it's manual underwriting requirements. To buy a house using an FHA loan requires you to have a minimum credit score of 580 to qualify with a minimum 3.5% down payment.
How does an FHA loan work with a credit score below 620?
If your credit score is below 620 FHA allows two types of loan approval. Your loan will be approved by Fannie Mae with either an Approve/Eligible or Refer/Eligible or what's called a manual underwriting.
The requirements for both are different. When your loan is an Approve/Eligible your maximum debt-to-income will be 31/43. This means that your mortgage payment will be 31% of your monthly income. And 43% of your monthly debts (mortgage payment, car payment, credit card payments, student loans, etc.) of your monthly income.
If your loan receives an Approve/Eligible and your credit score is below 620 there are no reserves required. You will need to have the 3.5% down payment and either enough funds for closing cost or enough credits to close. FHA does allow the seller to pay up to 6% of the purchase price for closing cost.
If your loan receives a Refer/Eligible this means the maximum
debt-to-income ratio should be 31/43 but you will need to have one month's
reserves. Reserves equals one month's proposed mortgage payment in the bank after closing.
If your credit score is below 620 FHA allows ratios above 31/43 with compensating factors. Compensating factors can be one of the following:
FHA below 620 credit score. If your loan receives a Refer/Eligible FHA allows the maximum debt-to-income ratio should be 37/47 with one compensating factor.
If your loan receives a Refer/Eligible FHA allows the maximum debt-to-income ratio of 40/50 with two compensating factors.
What if i do not have a credit score? If you have no credit score FHA guidelines assigns you a credit score of 580. Your loan will be a Refer/Eligible and you will need one months reserve to qualify.
Are you short funds to close? The FHA no closing cost loan allows all of your closing cost to be rolled into your loan including your appraisal fee, hazard insurance premium and even your escrow account.
What if i have collection accounts? FHA does not require collection accounts to be paid off as a condition of loan approval. However, if evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio.
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580 To 620 Credit Score, 580 To 620 Credit Score in Florida,
FHA announced a policy change to address risk and strengthen finances. FHA changed the minimum credit scores for new borrowers:
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