Unfortunately, there isn’t just one answer to the question “what is the minimum credit score for an FHA Mortgage.” Obtaining a mortgage is more than just having a good credit score. It also includes factors like having a steady income (work history) and reserves or assets for a down-payment. These additional factors along with your credit score help to determine whether or not you qualify for an FHA mortgage.
The FHA Department of Housing and Urban Development guidelines state that for FHA loans:
Keep in mind that these “guidelines” are just that – guidelines. Financing is not guaranteed based only on an individual’s credit score. Other compensating factors determine whether or not a buyer can obtain a home loan.
Compensating factors are essentially strengths on a loan application that may help you to be approved for a loan even if you do not fit the exact terms or guidelines necessary for loan approval. You will hear “compensating factors” quite a bit during the mortgage process when lower credit scores are involved. They can include your debt-to-income ratio, length of current residence history, and liquid assets depending on your circumstances.
In addition to compensating factors, each bank has their own guidelines that are in addition to the FHA/HUD guidelines. These are called overlays.
Bank overlays are guidelines put in place by individual banks and lenders that help them determine whether or not they should approve a mortgage application. They are separate from, and sometimes stricter than, FHA guidelines.
Banks use overlays to determine whether or not they will underwrite a file. For instance, if a client has a 606 middle credit score and has an acceptable debt to income (DTI) ratio that meets standard bank guidelines, he may assume that his loan application will be approved. The application may still be rejected, however, due to the bank’s credit overlays.
Certain banks have 620 or 640 minimum credit score overlays, causing their guidelines to be stricter than the FHA’s. As a result, they cannot approve the loan and underwrite the file.
There is no one-size-fits-all answer when it comes to determining the minimum credit score for an FHA mortgage. A lot depends on the strength of the rest of your file, compensating factors and bank overlays.
If you are concerned about whether or not you will qualify for an FHA loan, working with a mortgage broker is likely your best option. Mortgage brokers have access to numerous banks and programs and can therefore shop the strengths of your file to wholesale lenders that fit your credit score and profile.
Check out our page about New York FHA mortgages for details about the key benefits and features of FHA mortgages!
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