Accept it or not, the financing world looks at everyone as a number called credit scores. Sure, there are other factors to loan or credit card approvals, but it all starts with credit scoring. Very few fully understand the inner workings of these important numbers. Therefore, many either struggle to build a solid score, understand how it works, or both. Luckily, the FHA loan credit score requirements are lenient and allow opportunities for borrowers with thin credit files. There’s even opportunity for home buyers with only one credit score.
Why Do I Have Only One Credit Score?
The majority of mortgage lenders review the 3 major credit repositories before offering a mortgage loan approval. So, mortgage lenders prefer to see 3 scores because it means a borrower typically has better credit depth. But, the funny thing is that mortgage lenders drop the high and the low score to come up with the one middle credit score. Then, everything else is based on that middle score. From this point on, lenders don’t discuss 3 scores within the underwriting and rate lock departments. They say “the middle score” or just “the score” is 700.
The interest rate, minimum credit score guidelines, and approvals are based on that one number. But, if a buyer has applied for a mortgage loan with only one credit score, the realization comes clear that this isn’t so cut and dry. So, why would someone have just one credit score?
Reasons for One or No Credit Score
- Just established credit
- Chosen creditors report to only one bureau
- No recent credit activity
- Too much derogatory credit
Notice that only one out of four reasons deals with bad credit. Therefore, just because someone has no scores or only one credit score, doesn’t mean it is bad credit. Although, it could obviously be the reason. Often, the issue is just not enough established credit reporting to all 3 credit bureaus. Plus, the only credit may be older derogatory credit. In cases like these, it is key to establish new credit the right way. We recommend reading another one of our articles about establishing credit the right way.
One Good Score
If a borrower has only one credit score, reason #2 above is the best one to have. For instance, a first time home buyer may bank at a credit union which only reports to one credit bureau. In this case, a buyer may have a well established credit history for one credit bureau. But, since no accounts report to the other two bureaus, the credit scores are zero. Does this mean the home buyer has bad credit? No! Yet, it does make for a tougher loan approval when it comes to buying a home with many lenders. There is a solution! Our FHA loan credit score requirements allow for only credit score.
FHA Loan Credit Score Requirements
Each lender has it’s own FHA loan credit score requirements. Some are 500, others 580, and some require 640. But, even if a borrower meets a certain credit score, it does not guarantee approval. Here is how lenders treat score variations.
- 3 Credit Scores = Use the middle score
- 2 Credit Scores = Use the lower of the two
- 1 Credit Score = Use the one score
“We all have a number, so we might as well have a high number!” Russell Smith, Mortgage Blogger, Trainer, & Operations Manager at OVM Financial
At OVM Financial, we look at the entire picture. Sure, we start at the credit score. But, then we dig deeper to find ways to approve a loan. We will not just see one or two credit scores and stop there. The next step is to have a detailed discussion to find reasons for the limited scores. Then, we look for opportunities! Some are obvious, where others take some investigating. But, we are going to look for a way to approve a loan rather than take the easy path of credit denial. Even if an approval is not possible now, we will provide steps to take for improving approval chances in the future. Hopefully the near future!
FHA Manual Underwriting – Build Compensating Factors!
The mortgage underwriting process starts with an automated underwriting pre approval. Although having just one credit score does create challenges on these automated approvals, there are other options. FHA loan credit score guidelines allow for a manual underwrite. For those of us that have been in the mortgage industry a while, it means going old school. Actually reviewing the make-up of the credit file, the income, assets, and the compensating factors. These factors are the positives and we work to highlight enough positives to outweigh the negatives.
Top 10 FHA Loan Compensating Factors
There are 10 primary ways for a borrower to increase chances of an FHA loan approval. The more a buyer has, the better chances of loan approval. Earlier we mentioned how lenders start at the credit score. Well, these are the other areas that lenders review. So, these compensating factors go a long way towards an FHA manual underwriting approval:
- Rent history
- Asset reserves
- Down payment from own funds
- Alternative credit
- Low debt ratio
- Minimal payment shock
- Non occupying co borrower
- Time on job
- Credit explanation
- Extenuating circumstances
Do not wait to have all of the factors above. Just one or two very solid factors could make the difference! For instance, a solid verifiable rent history and a couple alternative credit references could be enough for an FHA approval. Make sure to mention any of these factors to your loan officer!
Keep in mind that a credit file with only derogatory items will have a very little chance of approval. There needs to be a proven history of paying creditors on time.