Credit scores are often the number one determinant on whether or not you are eligible for a mortgage loan. Some banks are more flexible than others, but most programs have a minimum score that is allowed in order to get the loan. The good news is that the minimum score for the streamline 203K loan is typically 580. This is not to say that every FHA 203K lender will adhere to this rule, so you may need to shop around if your score is that low, but in general, you should find it fairly easy to get a 203K loan.
Why Credit Scores Matter
You might wonder why your credit score would matter when taking on a mortgage loan if you have adequate income and a steady job, why can’t you just have the loan? The reason is simple – your credit score reflects your financial responsibility. If you have a score of say, 500, that tells lenders that you are irresponsible with your money. Even if on paper you make a lot of money, your credit report shows that you do not know how to manage it. A low credit score could mean that you pay your bills late, don’t pay your bills at all, take out too much debt and get in over your head, or only make minimum payments. There are a large number of factors that go into your credit score including the following:
- The number of timely payments you make
- The amount of debt you have outstanding compared to your available credit
- How long you have had available credit (the longer the better)
- The mix of the types of credit you have, such as installment loans, mortgage loans, and revolving debt
- Amount of new credit opened
As you can see, the credit score tells the lender a lot about you without talking to you. They will have to do some research to figure out why your score is low, if it is, but looking back at your history will give them a good idea of what is going on and whether or not you are a good credit risk.
The Streamline 203K is Flexible
The good news is that because the streamline 203K loan is offered by FHA, they have flexible guidelines. FHA loans are known as one of the easier loans to qualify for, even if you have a negative credit history. What the FHA and the lender providing the loan want to know the most is why you have negative credit history. Oftentimes, there are perfectly acceptable explanations to a low credit score, which gives the lender more leeway to provide you with the loan. For example, if you lost your job suddenly and had to make late payments until you found another job, that was likely a one-time occurrence and if you showed that you were able to bounce back quickly, the FHA usually grants the exception, providing you with the loan.
Overall, low credit scores are often allowed with the streamline 203K loan. How low a lender will go depends on the lender itself as well as your other factors. If you have a low credit score, high debt ratio, and unstable income, they you are likely too high of a risk for any lender. On the other hand, if you have compensating factors that make up for your low credit score, such as a low debt ratio and great job stability, they the lower credit score may be able to be overlooked. Remember that every lender has their own requirements, so make sure to shop around with various lenders because you might find the perfect lender that sees a reason to give you the loan.