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From the Financial Hotline

By: Financial Hotline
Spring 2019 (Vol. 37, No. 1)

Q: What is the minimum credit score needed to buy a home with FHA financing?

A: Minimum credit score requirements for FHA home loans depend on which FHA loan product you need. In general, to get maximum financing (3.5% down payment) on a typical new home purchase, applicants should have a credit score of 580 or better. Those with credit scores between 500 and 579 would need to make a down payment of 10% and are limited to 90 percent loan to value.

Applicants who have a credit score of less than 500 are not eligible for FHA mortgages. The FHA does make allowances for loan applicants with a “nontraditional credit history or insufficient credit” who may be able to be approved for an FHA loan if they meet FHA requirements for such circumstances.

Q: How often does my credit score change?

A: According to MyFico, your FICO score is calculated each time it’s requested; either by you or a lender. And each time it’s calculated it’s taking into consideration the information that is on your credit report at that time. So, as the information on your credit report changes, your FICO score can also change.

How much your FICO score changes from time to time is driven by a variety of factors such as:

  • Your current credit profile - how you have managed your credit to date will affect how a particular action may impact your score. For example, new information on your credit report, such as opening a new credit account, is more likely to have a larger impact for someone with a limited credit history as compared to someone with a very full credit history.

  • The change being reported - the “degree” of change being reported will have an impact. For example, if someone who usually pays bills on-time continues to do so (a positive action) then there will likely be only a small impact on their score one month later. On the other hand, if this same person files for bankruptcy or misses a payment, then there will most likely be a substantial impact on their score one month later.

  • How quickly information is updated - there is sometimes a lag between when you perform an action (like paying off your credit card balance in full) and when it is reported by the creditor to the credit bureau. It’s only when the credit bureau has the updated information that it will influence your FICO score.

Q: How does a bankruptcy affect my FICO score?

A: A bankruptcy will always be considered a very negative event by your FICO® score. How much of an impact it will have on your score will depend on your entire credit profile. For example, someone that had spotless credit and a very high FICO score could expect a huge drop in their score. On the other hand, someone with many negative items already listed on their credit report might only see a modest drop in their score. Another thing to note is that the more accounts included in the bankruptcy filing, the more of an impact on your score.

As long as the bankruptcy is listed on your credit report, it will be factored into your score. However, as time passes, the negative impact of the bankruptcy will lessen. Typically, here is how long you can expect bankruptcies to remain on your credit report (from the date filed):

  • Chapter 11 and 7 bankruptcies up to 10 years.

  • Completed Chapter 13 bankruptcies up to 7 years.

Keep in mind that these dates refer to the public record item associated with filing for bankruptcy. All of the individual accounts included in the bankruptcy should be removed from your credit report after 7 years.

Q: How long will other negative information remain on my report?

A: Late payments, foreclosures and public record entries will stay on your record for seven years. Collections, in general, will stay on your record for seven years depending on the age of the debt being collected. Late payments and other negative information that is older than 7 years may not automatically drop off your credit file. You can have them removed by pulling a report directly from the credit bureau and then use your report number to file a dispute, stating that the accounts are too old to be listed.