Neither HUD nor the Federal Housing Administration (FHA) lends money to prospective homeowners. FHA, an entity comprised within HUD, insures mortgages on all types of properties, with attention placed on owner-occupied single-family dwellings. Homeowners must seek lenders that provide FHA loans. Participating lenders, that are reimbursed by the federal government if a debtor defaults on an FHA loan, ultimately make underwriting decisions, based partially on credit scores, that can be informed by advice from HUD.
According to a report by Luke Mullins of U.S. News and World Report, borrowers have, historically been drawn to FHA loans because of their less restrictive credit and down payment requirements relative to traditional mortgages. Considering that the housing market plummet began in 2007, Mullins notes the popularity of FHA loans has improved, due, in part, to the ability to get into a house with relatively little money down. As of 2009, FHA loans account for about 30% of the American mortgage market. That is up from just 3% in 2006.
HUD’s”Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans” assists underwriters evaluate FHA loan programs ; however, it does not provide specific credit score requirements. HUD asks lenders to”analyze the overall pattern of credit behavior, rather than isolated occurrences of disappointing or slow payments.” Therefore, a very low credit score caused by a period of financial tumult can be missed if the applicant has met her credit duties for a”considerable” amount of time after a misstep. The average credit score for FHA loans, reports Mullins, is approximately 690, at the end of 2009. This at least gives applicants something to consider when opting for an FHA loan.
Back in January 2010, HUD announced an update to FHA loan approval coverage that said specific numbers with regard to credit scores. A vital feature of an FHA-backed mortgage is its low down payment condition: 3.5 percent, as of July 2010. HUD currently requires new applicants for FHA loans to have a FICO credit score of at least 580 to qualify for the 3.5 percent down payment perk. A FICO score below 580 requires the debtor to put down at least 10 percent.
While HUD has said little about credit scores, with the exclusion of the above-mentioned alteration, the Department uses specific numbers for debt-to-income ratios. HUD notes mortgage debt can account for 29 percent of a homeowner’s income; total debt–such as the mortgage, automobile loans, student loans, credit cards and other obligations–can consume to 41 percent of a debtor’s income. These numbers are 28 and 36 percent, respectively, for traditional loans, clarifies HUD.
According to Mullins’ report, to find the best terms on a traditional mortgage, homebuyers require a credit score of at least 730. A 20 percent deposit is also usually required. Mullins explains that borrowers can still qualify for conventional mortgages with a credit score under 730; however, the terms may not be favorable. His report suggests that homeowners who have less than perfect credit and small money up-front are probably best off entering the FHA route.