FHA Credit Guidelines For Bad Credit On FHA Loans

FHA Credit Guidelines For Bad Credit On FHA Loans

If you are a borrower and you are seeking an FHA loan, you need to be aware of the FHA Credit Guidelines.  FHA Credit Guidelines for bad credit and late payments are a lot more lenient than Fannie Mae and Freddie Mac guidelines on conventional loans. FHA loans are the most popular mortgage loan program for first-time homebuyers with little or no credit or borrowers with prior bad credit and low credit scores. You can qualify for an FHA loan with credit scores down to 500 FICO.

How Can I Qualify For An FHA Loan With Low Credit Scores?

How Can I Qualify For An FHA Loan With Low Credit Scores?
The first misconception people have is just because they have the minimum FICO score required that they are assured a loan, but they still are not.  Your credit score is just a piece of the overall puzzle needed by underwriters to approve your loan. It is better to have a lower credit score but on-time payments in the past 12 months than high credit scores but recent late payments.

FHA Credit Guidelines On Borrower’s Credit Profile

FHA Credit Guidelines take into account credit scores, credit history, collection accounts, payment history, bankruptcies, foreclosures, short sales, deed-in-lieu foreclosures, tax liens, late payments, and judgments.  FHA Credit Guidelines allow for a credit score as low as 580 to get approved for a 3.5% down payment home purchase FHA loan, but all other areas need to be researched before the loan will be approved.

Can I Qualify For FHA Loans With 500 FICO?

HUD, the parent of FHA allows borrowers with under 580 FICO and down to 500 credit scores to qualify for an FHA loan. However, borrowers with under 500 FICO need a 10% down payment and either need to get an approve/eligible per automated underwriting system and/or be eligible for manual underwriting.

How Can I Get An Automated Approval per AUS or be Eligible for Manual Underwriting on FHA Loans?

To get an automated underwriting system approval, borrowers need timely payments in the past 12 months. To be eligible for FHA manual underwriting guidelines, borrowers need timely payments in the past 24 months.  Outstanding collections, charged-off accounts, repossessions do not have to be paid to qualify for an FHA loan as long as the date of last activity is over 24 months.

Bad Credit Versus Recent Late Payments

Bad Credit Versus Recent Late Payments
If you have bad credit and have had prior credit issues, you should consult a mortgage professional who doesn’t work with lender overlays like myself.  Lender overlays are additional requirements by lenders so that borrowers fit properly into their risk portfolio before funding a loan. It is fine to have outstanding collection and charged-off accounts, but the key to getting mortgage approval is to have timely payments in the past 12 months.

FHA Credit Guidelines On Bankruptcy and Foreclosure

Don’t fear if you are a borrower with a previous bankruptcy or foreclosure.  FHA Credit Guidelines can assist borrowers like you in obtaining a loan even with the negative credit history given you adhere to the guidelines.  FHA Credit Guidelines require a 2-year waiting period after a Chapter 7 Bankruptcy discharge date.  For Chapter 13 Bankruptcy FHA Credit Guidelines say that you can qualify for a mortgage the day after the Chapter 13 discharge date.

HUD Manual Underwriting Guidelines

However, the issue is that if you are not 2 years out from your discharge date you will need a manual underwrite and additional manual underwriting guidelines will apply to the loan.  During the manual underwriting process, you will need to show 12 months of good payment history if you are renting by means of canceled checks.

FHA Credit Guidelines After Foreclosure

FHA Credit Guidelines also state that there needs to be a 3 year waiting period after the recorded date of a foreclosure and/or deed-in-lieu of foreclosure.  Finally, there is also a 3 year waiting period after a short sale if you wish to qualify for an FHA loan.

FHA Credit Guidelines On Credit Scores and Debt-To-Income (DTI)

According to the FHA Credit Guidelines you can qualify for an FHA loan with as little as a 580 credit score and obtain a 3.5% down-payment home.  The caveat here is that any score under 620 will require a debt-to-income (DTI) cap of 43%.  However, if your FICO score is only 40 points higher at 620, you can then have a debt-to-income ratio of 56.9%.  If you are looking for an FHA loan and your FICO score is 580-619 we have resources to help you increase your credit score and we can get you over 620 where the FHA Credit Guidelines are more lenient.

FHA Credit Guidelines On Collection Accounts And Credit Disputes

FHA Credit Guidelines On Collection Accounts And Credit Disputes
FHA Credit Guidelines allow for borrowers to qualify for FHA loans with unpaid collection accounts without having to pay them off.  You first need to determine if they are medical or non-medical expenses as they are treated differently.

Relations of FHA Collection Accounts Versus Debt To Income Ratios

Per FHA guidelines medical collection and charge-off accounts are exempt from your debt-to-income ratio.  However, non-medical expenses are treated differently in the sense that if there is more than $2,000 owed, 5% of the amount is calculated in your monthly DTI ratio.  In terms of Credit Disputes, you cannot have any credit disputes on non-medical accounts.  However, on medical accounts, you can have credit disputes no matter how large the bill may be.

In Conclusion

In conclusion, you need to have a professional in your corner when dealing with the FHA Credit Guidelines.  Feel free to reach us at Loan Consultants at 844-275-2007. Text us for a faster response.  Visit us every day, 7 days a week for our daily news mortgage blogs. With an experienced loan officer behind you, I can get you the loan you deserve WITHOUT any lender overlays. We can make the loan to the minimum guidelines, plain and simple.

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