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Can an FHA loan solve a credit score conundrum?

by admin
March 10th, 2013

FHA loans represented 23 percent of all home loans in 2012, according to Ellie Mae, a provider of mortgage data — and this is in spite of the fact that mortgage insurance premiums have been increased several times for these government-insured home loans. Borrowers, whether they need a mortgage to buy a home or to refinance a home, often find that FHA lenders are able to approve an FHA 203b loan for someone who might not qualify for a conventional mortgage.

Every lender will need to meet FHA guidelines for a loan approval and will typically also be required to match the standards of their mortgage investors which may be higher than FHA standards. For example, while the FHA mandates that borrowers with a credit score of 580 or less must make a down payment of at least 10 percent, very few FHA lenders approve borrowers with a credit score under 620 or 640. Borrowers with a low credit score should search with several lenders to see if they can find one willing to approve an FHA loan.

FHA loan originations in 2012

According to Ellie Mae, the average borrower of an approved FHA loan in 2012 for a refinance had a credit score of 718, 88 percent loan-to-value, and a debt-to-income ratio of 39 percent. The average borrower of an approved FHA loan in 2012 for a home purchase had a credit score of 700, 96 percent loan-to-value, and a debt-to-income ratio of 41 percent.

Borrowers who were denied an FHA loan in 2012 for a refinance had an average credit score of 670, a loan-to-value of 88 percent, and a debt-to-income ratio of 44 percent. Those who were denied an FHA loan for purchase had an average credit score of 667, a loan-to-value of 95 percent, and a debt-to-income ratio of 47 percent.

FHA rates

Average FHA rates have been competitive with conventional mortgage rates in recent months and sometimes even lower. For example, according to HSH.com, for the week ending March 1, 2013, FHA mortgage rates averaged 3.39 percent while the average mortgage rate for a conventional loan was 3.80 percent. Borrowers can compare mortgage programs with a lender to find the best rates and the highest probability of a loan approval.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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