How Do Lenders Assess the Creditworthiness of HUD Loan Borrowers?


Banks and other mortgage lenders usually review loan applications based on character, capacity, capital, collateral and conditions, which are otherwise known as the five Cs of credit.

Business loans involve higher chances of risk for lenders, so it’s unsurprising why they are stricter with commercial loan applicants. If you plan to buy an apartment, you may have higher chances of approval when you apply for HUD multifamily financing such as an FHA loan.

The Benchmarks for Creditworthiness

Lenders review your character by looking at your credit history, which gives them an insight about your record for repaying debt. Major credit-reporting agencies such as Equifax, Experian and TransUnion keep financial details from seven to 10 years. However, don’t assume that lenders won’t discover any unpaid or unsettled historical debt for more than a decade old.

Capacity refers to a borrower’s available resources for paying off any existing and/or future loans, particularly their debt-to-income ratio. You can determine your ratio by dividing all your monthly debt payments with your gross monthly income. Lenders are more likely to approve applicants with a lower ratio.

Another way to improve your creditworthiness requires you to pay a higher down payment. For instance, FHA loans may require at least 2% down payment on a mortgage loan but try to increase your upfront payment to qualify for lower interest rates. By paying a higher amount, lenders can see that you have a higher capital contribution and therefore reduce their exposure to financial risk. Plus, banks and other financial institutions are more willing to approve a loan when the government acts the guarantor.

Having Trouble With Loan Approvals?

loan from a bank

You should apply for an FHA loan to buy a multifamily property, especially when traditional lenders always reject their applications. If you plan to rent it out, you need to go through the process of becoming an owner-occupant before you can accept tenants. The FHA requires borrowers to live in the property for at least one year prior to their plan of renting it out. An FHA-backed loan for an apartment mortgage is only limited to properties with up to four units.

A mortgage for an apartment with five or more units already falls under the commercial loan category. You need to apply as an investor if you don’t plan to occupy the building, which can be more tedious. Traditional lenders require property investors to pay a higher down payment worth from 20% to 30%.

Even if you have cash on hand, you need to score higher on each of the five Cs. Lenders also gauge your creditworthiness based on certain conditions and quality of collateral. The conditions often involve the interest rates, principal amount and the purpose for a loan.


While lenders use five benchmarks for creditworthiness, focus on improving your credit history and disposable income. Aim for a credit score higher than 580 to qualify for an FHA loan with lower-than-average interest rates. A higher score also allows you to pay a lower down payment since people with scores below 580 will need to pay 10%.

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