Lenders Do Not Average Your Credit Scores on an FHA Loan
Everyone says lenders average your credit scores. On an FHA loan, that is not how the deciding score is chosen. The guideline uses a different rule, and it can change what a buyer believes they qualify for before they ever apply.
Bruce and the Score He Was Sure About
Consider Bruce, a fictional homebuyer near Irmo, SC. He is an illustration, not a real client, but his situation comes up often. Bruce pulled his credit and saw several scores. He picked the best one, felt good about it, and assumed that was the number a lender would use. He also planned to buy with a co-borrower, and he never stopped to think about whose score would matter.
Bruce is not careless. He simply heard the same thing most buyers hear: lenders look at your scores and average them out, or at least take the good one. Neither is what the FHA guideline says.
The Deciding Score Has a Name
FHA calls it the Minimum Decision Credit Score, or MDCS. It is the one score the lender works from, and the guideline spells out how it is chosen. Here is the language: "Where three scores are reported, the median score is the MDCS. Where two differing scores are reported, the MDCS is the lowest score."
In plain terms, if three scores are reported, you line them up and the middle one is the MDCS. Not the highest, and not an average of the three. If two differing scores are reported, the lower of the two is the MDCS.
There is one more piece. When the mortgage involves multiple borrowers, the guideline says the lender must select the lowest MDCS for all borrowers. Each borrower gets their own MDCS first, using the rules above. Then the lowest of those becomes the score for everyone on the loan.
What That Means for Bruce
If Bruce has three reported scores, his middle score is his MDCS. The best score he saw does not decide anything. Now add his co-borrower. If the co-borrower's MDCS is lower than his, the lower number is the one selected for the whole file. Bruce can have the stronger credit and still be tied to the other borrower's number.
That is the surprise for many co-borrower buyers. It is not about who earns more or who is applying as the primary name. The guideline points to the lowest MDCS.
What the Thresholds Mean
The MDCS matters because the guideline attaches limits to it. A borrower is not eligible for FHA-insured financing if the MDCS is less than 500. Borrowers with an MDCS between 500 and 579 are limited to 90 percent LTV. Borrowers with an MDCS of 580 or above are eligible for maximum financing up to 96.5 percent LTV.
In other words, the number that decides the loan also decides how much financing is available. A score that lands just under 580 does not carry the same limit as one that lands at or above it. That is why knowing which score is the MDCS is more useful than knowing which score looks best.
What You Can Do Today
Before you apply, ask your lender this: "What is the Minimum Decision Credit Score for each borrower on this loan, and which of the reported scores is it?"
Then request the credit report showing every reported score for each borrower. Seeing all the scores is what lets you check the answer yourself. You can see whether there are three scores or two, which one is in the middle or at the bottom, and whose MDCS is the lowest across the loan.
Once you know that, you can make a clear decision about what to do next. You may decide to work on a particular score, to wait, or to look at your options. The point is that you are working on the right number instead of celebrating the wrong one.
Let Me Help You Find the Path
I am Jason Sharon, a licensed mortgage broker at Home Loans Inc. If you are thinking about an FHA loan, on your own or with a co-borrower, I will walk through your reported scores with you and explain which one is deciding. Call 843-LOW-RATE. I find the path.
This article is educational and uses a fictional example. It is not a loan offer or commitment to lend.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: Lenders Do Not Average Your Credit Scores on an FHA Loan
