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Applying for a mortgage can be a daunting exercise, especially if you have made financial mistakes in the past and feel that your credit score may interfere with your loan application. This also applies to government subsidized loans through agencies such as the Federal Housing Administration which offers low-cost mortgages to medium- to low-income families. However, if you feel your credit rating will get in the way of your home purchasing dreams, take heart, this is not necessarily the case. Although your credit score is a significant factor when applying for an FHA loan, it is not the only factor. The FHA lending and underwriting rules allow for flexibility with reliable lenders which may have had some credit hiccups in the past.
So what are the FHA rules on lending? This article provides a brief overview on what the FHA looks at when assessing a loan.
There are four factors that determine the eligibility of a borrower to a loan: credit history, steady employment, debt-to-income ratio and your payment history in the last 12 to 24 months. This means that if your credit score is low because of a financial problem or mistake you made several years ago, but you score well in the other areas, you may still qualify for an FHA loan. Nevertheless, what constitutes a good or acceptable credit score for the FHA? This depends on the loan, but the FHA does have a general standard for most of its loans.
The FHA and Credit Scores
The FHA applies a sliding scale rule on loans depending on the credit score of the borrower. Borrowers with a higher credit score can apply for a higher loan to value percentage of the purchasing price of a property. For example, credit scores between 500 and 579, which would be considered very low by commercial lenders without the insurance of the FHA, can qualify for a maximum of 90 percent of the loan to value rate of the property. If your credit score is higher than 580, you may be eligible for the maximum FHA loan financing, as long as the other areas are also satisfied. If your credit score is below 500, you are not eligible for an FHA loan.
Therefore, the answer to the initial question of this article, the minimum credit score to be even considered for an FHA loan is 500. Anything less and your application will not even be considered. However, even applicants with credit scores as low as 500 to 600 can qualify for loans as long as the other elements the FHA looks into are above board.
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