FHA Minimum Credit Scores

I've been getting a lot of questions regarding the minimum credit score for an FHA mortgage. I know, Larry Lender says the minimum score is 620, but Barbara Banker says she'll go down in the basement to a 500 credit score. Of course, you don't know who to believe because everybody seems to be full of manure. That being said, here's my take on it...

Many lenders are now requiring a minimum score of 620 to get an FHA mortgage approved. Some are saying 620, no exceptions, otherwise we won't play ball. Others are saying we'll go down to 500, but only for certain kinds of properties and only under certain conditions. Well, to make your life as simple as possible and reduce those ogeda flare-ups (or is it agita...who cares), do what you gotta do to raise your score above 620. But, if there's no hope to raise your credit score from the ashes in a short time period, here's what I've come to find out. If you're below 620, don't even think about getting approved for a 3- or 4-family FHA mortgage. As far as I can see, it ain't happenin'. I'm not saying it's impossible, but it's highly risky for a lender to approve it. Someone told me the default rate for 3- and 4-families is about 30%? Ouch! Would you loan someone money with a default rate that high? I think not.

Right now there are lenders who will go as low as a 540 credit score if the property is a 1- or 2-family. There aren't many which will do it, but some do exist. I know one lender which touts the credit score doesn't matter for a 1-family, as long as the deal makes sense. That means all of the other numbers and factors have to jibe regarding the deal, such as income, debt ratio, assets, extenuating circumstances, etcetera. Then you’d probably have to jump through multitudinous hula hoops, do back-backflips and give up your first born to get it approved, but so be it. So, what's the sense of it all?

Depending on how a lender does business -- meaning whether it's approved to underwrite FHA deals or whether it brokers the deals -- that may be the deciding factor regarding the lender you're dealing with. If your mortgage company is underwriting the loan and lending its own money, odds are 620 will be the minimum score. If the deal is brokered to an outside lender, then the minimum credit score requirement can dip down to 500 or below. When you go to Larry Lender and he brokers the deal, Larry isn’t lending his own money so he doesn’t care about credit score, debt ratio, etcetera – his money ain’t risk so it doesn’t matter to him.

Another factor is how your lender sells loans it underwrites to investors. Some lenders may have outlets to sell mortgages to investors with a credit score below 620, while others may not. Normally, if a mortgage can't be sold and/or traded like a baseball card, it won't be approved. Most lenders don't hold onto mortgages and sell them to Wall Street or whoever else will buy them. Also, if a lender holds onto your mortgage and doesn’t plan on selling it, it may make certain exceptions to get your loan approved.

Anyway, the real deal is that if someone says you can't get an FHA mortgage with a credit score below 620, that ain't reality on my side of the tracks. It can be done under certain conditions. You may have to put on your walking shoes and shop around, but sometimes it's worth it.

Copyright by Kirk Charles, 2009. Please do not reprint or redistribute without written consent of Kirk Charles.