Very shortly new manual underwriting regulations from FHA will become effective and make it easier for people with low credit scores to qualify for a mortgage. This is good news for people without a lot of debt but a low credit score.
Under the new rules the following changes will be made.
First, HUD has taken the opportunity to address the issue of borrowers who exceed the 31 percent housing-to-income ratio, yet carry little or no discretionary debt and, therefore, do not exceed the maximum 43 percent debt-to-income ratio.
Second, HUD has addressed the relationship between compensating factors and “stretch ratios” that permit borrowers to exceed the housing payment and total debt-to-income ratios under certain FHA mortgage insurance programs.
Third, the new guidelines establish additional compensating factors that can be used to qualify borrowers who exceed FHA’s standard housing payment and debt to income ratios.
Fourth, HUD has reduced the credit score (from 620 to 580) below which compensating factors may not be cited and the standard ratio guidelines may not be exceeded.
Fifth, HUD has extended the applicability of these underwriting policies to FHA to-FHA rate and term refinance transactions (no cash-out) and credit-qualifying FHA streamline refinance transactions.
No Credit or Bad Credit FHA Mortgage Borrowers
Borrowers with no credit score or with credit scores below 580 may not exceed the standard 31/43 ratios. This means that the mortgage payment-to-income ratio (the front-end ratio) may not exceed 31 percent, and the total fixed payment-to-income ratio (the back-end ratio) may not exceed 43 percent.
Other factors will help people to qualify for an FHA mortgage if they are just at a 580 credit score. Once the borrower reaches a credit score of 580 or greater, compensating factors such as 3 months of reserves or the purchase of an energy-efficient home will raise the qualifying ratios even further.
FHA provides the following table to help those with low credit score better understand how to qualify for a new mortgage.