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FICO score issues are among the many common questions about FHA loan applications. We get a lot of questions about FICO score issues, especially for those applying with a spouse or partner.

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Why FICO Scores Matter

Why FICO Scores Matter
February 28, 2016 - FICO score issues are among the many common questions about FHA loan applications. We get a lot of questions about FICO score issues, especially for those applying with a spouse or partner. “My partner’s credit score is 749 and mine is 620. Would we qualify for a loan together with a favorable rate?” That’s just one example of the kinds of credit score questions we receive, and it’s a type of question implying that FICO scores are the deciding factor for an FHA loan approval decision.

Is this true?

Credit scores are very important--the lender is required to review your FICO scores and the results of that review can and usually do affect the type of interest rate--and in some cases the amount of down payment--associated with the mortgage loan or refinance. But FICO scores are not the only factor taken into account by the lender.

In addition to reviewing FICO scores, your history of payments on all financial obligations–especially those made in the last 12 months--is reviewed. Late or missed payments on any financial obligation 12 months before the loan application can hurt your chances at loan approval even if your FICO scores are considered acceptable to the lender.

Why?

Because your lender is looking for patterns of financial reliability. Patterns which are established by your payment record. FICO scores are a major factor in your home loan, but in the last 12 months your loan officer will be looking for further evidence that a particular borrower is a good credit risk, that the borrower’s income is “likely to continue”, and that your payment habits are likely to continue, too.

In the example we give above, there are two FICO scores–one of which is higher than the other. The lower FICO score–620–may be within the acceptable range for some lenders, and for others it may be slightly lower. Lender standards vary--some look for scores in the 640 range, while others may be willing to work with a slightly lower score and still offer maximum financing and a good interest rate.

A FICO score below 620-640 may not be a barrier to loan approval, but it may influence other aspects of the loan including the interest rate. There are many factors at work that may determine how FICO scores at 620 or below are interpreted by the lender–those include lender standards and the other aspects of a borrower’s credit history.

FICO scores are handled on a case-by-case basis, because no two home loan applications are alike. Lenders must review the individual details in order to make a determination. Much can depend on other factors including your payment history, state law, how much of a down payment you are making, and whether or not there are compensating factors that might work in the borrower’s favor to offset other aspects of the credit check the lender may find marginal or lacking.

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