FHA Loan Rules and Lender Requirements
February 21, 2012
FHA mortgage loans have specific rules about credit, employment history, verifiable income and more. But there is often confusion over the rules because of differences between a participating FHA lender's requirements versus the FHA loan rules.
For example; FHA loans require a minimum FICO credit score, but some lenders won't approve loans unless the borrower's score is higher than the FHA minimum. Why does the lender require a higher score? Isn't the borrower qualified at the lower FHA minimum?
The confusion here happens thanks to the expectation that the FHA rules have the final say. In reality, when it comes to a lender with higher standards than FHA minimums, FHA lenders are free to require higher credit scores and other criteria--but those requirements must be applied equally for all applicants.
Such higher standards also must not violate fair housing laws, and must be "reasonable and customary" for the housing market they are enforced in.
What would be considered out of bounds for a lender? Charging a 50% interest rate, for example, on an FHA mortgage-such a high rate would never be reasonable in the lending industry. But charging a slightly higher or slightly lower interest rate based on a borrower's financial qualifications IS both "reasonable and customary".
If a borrower's credit score is within a certain range, that borrower could be eligible for more competitive terms; if your credit is in a different range, you may not be qualified for an FHA loan with a particular lender unless you have "compensating factors" such as a larger down payment, large cash reserves, etc.
Borrowers who currently have credit scores near the FHA minimum should contact the FHA directly and get information on housing and credit counseling. FHA loans do have requirements, minimums, and guidelines that must be followed. A borrower reviewing an FHA loan application who sees credit scores at the bottom of the allowable range may question the borrower's credit worthiness.
If you're looking for a new home, give yourself enough planning time to get credit counseling and work on improving both your credit score and your chances for loan approval.
For example; FHA loans require a minimum FICO credit score, but some lenders won't approve loans unless the borrower's score is higher than the FHA minimum. Why does the lender require a higher score? Isn't the borrower qualified at the lower FHA minimum?
The confusion here happens thanks to the expectation that the FHA rules have the final say. In reality, when it comes to a lender with higher standards than FHA minimums, FHA lenders are free to require higher credit scores and other criteria--but those requirements must be applied equally for all applicants.
Such higher standards also must not violate fair housing laws, and must be "reasonable and customary" for the housing market they are enforced in.
What would be considered out of bounds for a lender? Charging a 50% interest rate, for example, on an FHA mortgage-such a high rate would never be reasonable in the lending industry. But charging a slightly higher or slightly lower interest rate based on a borrower's financial qualifications IS both "reasonable and customary".
If a borrower's credit score is within a certain range, that borrower could be eligible for more competitive terms; if your credit is in a different range, you may not be qualified for an FHA loan with a particular lender unless you have "compensating factors" such as a larger down payment, large cash reserves, etc.
Borrowers who currently have credit scores near the FHA minimum should contact the FHA directly and get information on housing and credit counseling. FHA loans do have requirements, minimums, and guidelines that must be followed. A borrower reviewing an FHA loan application who sees credit scores at the bottom of the allowable range may question the borrower's credit worthiness.
If you're looking for a new home, give yourself enough planning time to get credit counseling and work on improving both your credit score and your chances for loan approval.
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