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FHA has loan option for low-FICO homebuyers

September 6, 2024

How low can a FICO score go for a homebuyer to mortgage qualify?

Federal Housing Administration mortgages, in some cases, allow a FICO score as low as 500. This is a homeownership inroad for those who thought they could not qualify.

The same is not true when it comes to conventional financing from Fannie Mae and Freddie Mac, which both require a 620 or higher FICO score. Many subprime lenders offering exotic mortgages, or so-called nonqualified mortgages, only go down to a 620 score. Few subprime lenders will allow scores lower than 620.

Also see: Interest rates have dropped, but homeowners are not moving

Most borrowers and real estate professionals don’t think about Federal Housing Administration loans when it comes to rough credit. Indeed, FHA is a great solution for credit-challenged borrowers.

Largely, you can get in with just 3.5% down. If the lowest middle FICO score of all borrowers is 580 or higher, then the minimum required down payment is 3.5%. If it’s 500-579 then a minimum of 10% down is required.

Buyers can use gift funds as a down payment, too. And they can use non-occupant co-signers to help qualify.

FHA interest rates range from 5.125% for borrowers with good credit scores or 7% for credit-challenged borrowers.

Qualifying income is generous. The total house payment plus monthly recurring bills or debt-to-income ratio can be as high as 56.99%. Subprime or non-QM financing will not allow a buyer to exceed 50% DTI. Conventional financing from the likes of Fannie Mae and Freddie Mac requires the DTI to be under 50%.

Los Angeles County and Orange County are high-cost areas, so the maximum loan amount for a single home or condo is $1,149,825, a two-unit property it’s $1,472,250, three units is $1,779,525 and four units is $2,211,600.

The Inland Empire does not have so-called FHA high-balance or jumbo loans. The maximum loan amount for a single home is $644,000. For two units it’s $824,450, three units is $996,550 and four units is $1,238,500.

San Diego County is somewhere in the middle. The maximum loan amount for a single home is $1,006,250. Two units is $1,288,200, three units is $1,557,150 and four units is $1,935,150.

You may need to come in with more than the minimum down payment for three- or four-unit properties. Qualifying is a bit more complicated, too. The FHA self-sufficiency test considers whether the rental income will cover the mortgage after expenses or a vacancy factor. Call your mortgage broker for more granular details.

And if there’s a non-occupant co-signer, buyers must put 25% down when it comes to multiple units.

FHA requires owner-occupancy on its mortgage. In the case of multiple units, one of the units needs to be owner-occupied. A buyer can rent out the other units.

One downside to FHA financing is the mortgage insurance premium. Conventional financing requires private mortgage insurance if the borrower is putting less than 20% down. FHA mandates mortgage insurance even with down payments of 20% or more. And it’s not cheap.

There is an upfront mortgage insurance premium or MIP of 1.75% of the loan amount. For example, if your base loan amount is $100,000 then your total loan amount would be $101,750 when the MIP is added. Plus, you have a monthly mortgage insurance premium or MMI on a 30-year fixed of 0.55% when the loan is less than 10% down and the loan amount is under $726,200. A 10% or more down payment brings the monthly mortgage insurance down to 0.5%.

When the loan amount is $726,200 or more, and you are putting less than 10% down the MMI is 0.75%. If you are putting 10% or more down on a loan amount of $726,200 or more, then your MMI is 0.7%. For example, on an $800,000 loan the 0.75% would add $500 to the monthly payment.

FHA mortgage insurance is more of a pass/fail chart, no matter the borrower’s FICO score. In conventional loans, the mortgage insurance is matrix driven. The better the credit score, the cheaper the mortgage insurance.

Freddie Mac rate news

The 30-year fixed rate averaged 6.35%, unchanged from last week. The 15-year fixed rate averaged 5.47%, 4 basis points lower than last week.

The Mortgage Bankers Association reported a 1.6% mortgage application increase compared to one week ago.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $766,550 loan, last year’s payment was $392 more than this week’s payment of $4,770.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.125%, a 15-year conventional at 4.875%, a 30-year conventional at 5.5%, a 15-year conventional high balance at 5.25% ($766,551 to $1,149,825 in LA and OC and $766,551 to $1,006,250 in San Diego), a 30-year-high balance conventional at 5.875% and a jumbo 30-year fixed at 6.25%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $766,550 in LA, San Diego, and Orange counties.

Eye-catcher loan program of the week: A 30-year FHA fixed rate at 5.625% with zero points cost.

Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].

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