Can You Qualify for an FHA Loan With a High Credit Card Utilization?
FHA loans are mortgages insured through the Federal Housing Administration. FHA guidelines help more people buy affordable homes by permitting low downpayments and standards that are more flexible than conventional loans. Credit score and history is one of the areas where FHA guidelines show more leeway. High credit card utilization alone will not keep a borrower from getting an FHA loan, but it can create factors that prevent approval.
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FHA Credit Scores
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FHA loan guidelines set a minimum credit score of 500. Any applicant with a score below 500 is not eligible. Applicants with a score between 500 and 579 must place a minimum of 10 percent down. A 580 or better score lets a borrower qualify for a 3.5 percent downpayment. Applicants without a credit history or score can create a non-traditional credit history to qualify.
History
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Credit history is more important for FHA qualification than credit score. FHA borrowers must have solid credit within the previous 12 months, without late payments or new collections. There is a mandatory waiting period of two years following a Chapter 7 bankruptcy and three years after a foreclosure, along with positive reestablished credit.
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Debt to Income
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Another factor in FHA loan qualification is the borrower's debt-to-income ratio (DTI). This ratio is the new mortgage payment compared to gross (pretax) monthly income, and the total set monthly debts, including the new mortgage payment, compared to gross monthly income. Set monthly debts include car payments, student and other installment loans, credit card minimums, child and spousal support and any payments toward liens, collections or judgments. FHA guidelines require that a borrower's mortgage take up no more than 31 percent of his gross monthly income and that his total monthly debt take up no more than 43 percent.
Credit Score Criteria
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A person's credit card debt versus available credit is not a part of FHA criteria, but it can have an impact. According to Fair Isaac Corporation's website, credit card utilization comprises 30 percent of a person's credit score. Credit reporting agencies like to see balances at or below 30 percent of available credit. This demonstrates the responsible use of credit. High credit card utilization will drop a borrower's score, which could affect her ability to get an FHA loan or the minimum downpayment.
High Debt
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If high credit card utilization creates high monthly debt, it could push a borrower's DTI outside of FHA limits. While there are some specific allowable exceptions to the FHA maximum ratio, they must be approved by an underwriter. Underwriters do not look favorably on someone who shows he has trouble managing his money by carrying too much debt, considering him a high risk borrower.
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References
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