Your credit score (FICO) plays a huge role in any home mortgage loan application process. This is not different for FHA 203K loan applicants, although credit rating conditions are more lenient with this program than they are when applying for private mortgage loans. When applying for a private mortgage loan you likely need to have a minimum FICO score ranging between 620 and 640.
Each lender sets its own policies for private loans, but all lenders are more lenient regarding credit scores for FHA 203K loan applicants. In fact, many lenders approve borrowers with as low as a 500 FICO score for FHA 203K loans. Why are FICO score conditions more lenient for these types of loans?
Because the FHA insures the borrowed funds, lenders have guarantees they will not lose their money, even when borrowers have displayed prior patterns of suspect creditworthiness. A FICO score is a three-digit number, which represents your overall creditworthiness by combining multiple factors including your:
- Number of unpaid debts and open accounts.
- Available credit on each account compared to balances owed.
- Late payments.
- Charge-offs and liens.
- Number of recent credit inquiries.
Your debt-to-income ratio is also considered. This ratio must be a maximum of 43% for you to qualify for an FHA 203K loan. This means a maximum of 43% of your income is permitted to be applied toward your home mortgage and other bills for you to qualify for this FHA loan.
The first step in applying for an FHA 203K loan is to choose your new home. Next, locate an FHA-approved lender and ask for free APR and term quotes. Use a comparison-shopping strategy to find the best loan program for your needs.
Take advantage of soft pull credit pre-approval checks to see if you qualify before your credit is fully checked. Only if you meet the basic qualifications should you agree to submitting a full application.
Additional FHA 203K loan application steps include:
- Researching contractors and receiving quotes.
- Submitting contractor quotes to your lender for final approval.
- Submit your down payment.
- Sign all mortgage documents.
- Close on your home
- Commence the repair process.
- Move into your home during or after repairs are completed, whichever is applicable.