The Federal Housing Administration helps borrowers with credit challenges, low and moderate income and minimal cash on hand acquire home loans. Since 1934, its flexible eligibility guidelines have helped borrowers obtain loans with affordable monthly payments. The FHA allows borrowers with high credit card utilization to qualify for a home loan if their income and assets demonstrate that the added house payment presents no significant risk.
The FHA insures loans made by approved lenders and reimburses them in the event of borrower default. To minimize its risk, the FHA -- under the guidance of the Department of Housing and Urban Development -- sets benchmark guidelines for what is acceptable in terms of borrower debt. The debt-to-income ratio represents a borrower's monthly obligations relative to his gross monthly income and expresses it as a percentage. There are two types of DTI ratios: the front-end ratio, which measures the housing payment relative to income; and the back-end ratio, which compares total monthly obligations to income. The FHA's benchmarks for these ratios is 31 percent and 43 percent, respectively.
Credit card utilization impacts borrower credit scores and borrowers must meet FHA minimum credit score requirements. On a purchase or refinance, the borrower must have a credit score of at least 500 to qualify. A borrower with a score of 580 or higher qualifies for the FHA's maximum available financing, and such a borrower may make a down payment of as little as 3.5 percent. A borrower with a score of 500 to 579 needs a down payment of 10 percent. High credit card utilization significantly lowers credit scores.
The amounts owed on credit cards relative to the available credit limits account for 30 percent of a consumer's score, according to MyFICO. "Amounts owed" is the second most important factor impacting scores. High credit card utilization, as when cards are close to being "maxed out," indicate potential difficulty making payments in the future. "Credit utilization rate has proven to be extremely predictive of future repayment risk," particularly in the subsequent two years, MyFICO says.
The higher a borrower's credit card utilization rate, the higher his monthly minimum payment on the account. The lender uses the minimum monthly payment reported at the time of application in calculating debt-to-income ratios. Therefore, high-use cards -- as well as the maximum loan amount the borrower can afford -- impact scores. By lowering the balance on a credit card, the borrower effectively increases his borrowing power on the FHA loan.
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