FHA Loans

FHA, which is part of the United States Department of Housing and Urban Development ( HUD ), is not a mortgage lender but an insurance provider for all FHA loans in this country.  FHA loans are extremely popular because it provides home buyers and refinance mortgage loan applicants the chance to qualify for a residential mortgage loan, owner occupant homes only, who otherwise cannot qualify for traditional residential conventional loan programs.

The FHA mortgage program does have FHA loan credit guidelines and  mortgage lending requirements like all other mortgage loan programs.  Out of the mortgage lending requirements, there is a minimum credit score and FHA loan guidelines requirements that all FHA loan applicants need to adhere to in order to qualify for a FHA insured mortgage loan.

FHA Loan Credit Guidelines Credit Score Requirement

FHA mandates a minimum credit score for all of its applicants among other mortgage lending requirements.  To qualify for a FHA loan with a 3.5% down payment, the minimum credit score required is 580 FICO.  A mortgage loan applicant can qualify with a credit score as low as 530 FICO.  However, if the mortgage loan applicant has a credit score between 530 FICO and 579 FICO, a 10% down payment is required and compensating factors will need to be provided.  Examples of compensating factors are higher down payment, rental verification, and reserves.

Start Improving Your Credit Scores Now

If you are intending on buying a home in the near future, start improving your credit scores now.  Credit repair does work and you do not have to hire a credit repair company to repair your credit.  There are very simple tricks of the trade that you can use to boost your credit scores.  If you had prior bad credit, it is no problem.  As long as you can start re-establishing your credit by adding new positive credit by getting several secure credit cards, you will be off to a great start.  Do not be late on any credit payments.  One 30 day late payment will plummet your credit scores.  Monitor your credit report at least every 4 months and check for errors.  The giant three credit reporting agencies, Experian, Equifax, and Experian, are notorious in making mistake and misreporting your credit information.  Errors can be removed by federal mandated credit reporting laws.  If you currently have a home loan, please do not be late under any circumstances.  Mortgage lenders do not want to see any late payments on a mortgage payments in the past 12 months and some mortgage lenders will have an overlay that you need to be timely on your mortgage payment for the past 24 months.  Some mortgage lenders will approve and understand if you have been late on your mortgage payment once in the past 12 months.  If you have been late on your mortgage payment 60 or more days in the past 12 months, it will be a challenge to get you a mortgage loan approval.  You need to contact your mortgage loan service provider and see if you can have that late payment removed.

FHA Loan Credit Guidelines: No Credit, No Credit Scores

There are folks who have never had any traditional credit and thereby do not have a credit score.  This does not mean that they cannot qualify for a FHA loan.  For these home buyers, we can use non-traditional credit.  What is non-traditional credit?  Non-traditional credit are established credit that is not reported to the three giant credit reporting agencies.  For example, water bills, telephone bills, gas bills, cellular phone bills, insurance payments, rental payments, auto insurance payments, and other forms of regular payments that is not reported to the three credit reporting agencies can be used in lieu of traditonal credit tradelines.

Bankruptcy, Foreclosure, Deed In Lieu Of Foreclosure, Short Sale

There are waiting periods after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale in order for you to qualify for mortgage loan programs.  For FHA loan credit guidelines mandates a two year waiting period after a bankruptcy discharge, and three years from the recorded date of a foreclosure and/or deed in lieu of foreclosure.  There is a three year waiting period after the settlement date of short sale which is reflected on the HUD’s settlement statement of the short sale.

FHA Credit Guidelines: Collection Accounts And Credit Derogatory Disputes

You cannot ever be delinquent on a government loan, student loan, child support payments, income taxes, and alimony.  If you are behind in any of the above loans, the loan must be current and in good standings in order to qualify for a FHA insured mortgage loan.  With regards to collection accounts, FHA has classifed collection accounts into two tiers:  Non medical collections and medical collections.  You can have collection accounts with open credit balances and charge offs and still qualify for a FHA insured mortgage loan.  However, new 2014 FHA loan credit guidelines state that with unsatisfied collection accounts over $1,000 balance, 5% of the balance will be used to calculate a mortgage loan applicant’s debt to income ratios.  This can create a big problem if the collection balance is a high amount.  On a $20,000 old collection account, 5% of $20,000 is $1,000 which can severly impact a mortgage loan applicant’s debt to income ratios.  The good news is that FHA will allow a written payment agreement and will take the agreed monthly payment plan in calculating the debt to income ratios.  For example, if you owe a collection agency $20,000 and you entered into a $200 per month payment agreement with the collection agency, then the $200 agreed payment will be used to calculate your debt to income ratios and not the $1,000 or 5% of the $20,000.  There is no seaoning requirement with this and the day the payment agreement is signed by both the collection agency and mortgage loan applicant, it is effective.  Medical collections with balances are exempt from this FHA loan credit guidelines.

Judgments And Home Loans

Judgments is probably one of the worst derogatory items you can have reported on your credit report.  You can still get a mortgage even if you have unsatisfied judgments only if you have a repayment plan into effect and have been making at least three monthly payments.

Credit Disputes During Mortgage Process

Disputing non-medical collections with credit balances over $1,000 is not allowed by FHA during the mortgage application process.  You need to retract the derogatory credit dispute with the open collection balance and it needs to be reflected on your credit report.  Unfortunately, retracting a derogatory credit dispute will lower the mortgage loan applicant’s credit scores.  Zero balance collection accounts, derogatory items, and charge offs are exempt from this non-medical derogatory credit dispute rule.  Medical collections, again, is exempt from FHA loan credit guidelines on credit disputes with open credit balances.


HUD launched the FHA BACK TO WORK EXTENUATING CIRCUMSTANCES DUE TO AN ECONOMIC EVENT mortgage loan program last August 15, 2013 which shortens the waiting period to one year for those mortgage loan applicant’s who have a prior bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  All Back to Work Extenuating Circumstances Due to an Economic Event morgage loan applications are all manual underwrites and mortgage applicants need to adhere to HUD’s FHA LOAN CREDIT GUIDELINES.  To qualify, the mortgage loan applicant needs to have been either terminated, laid off, or the employer needs to have gone out of business and the mortgage loan applicant needs to have had at least a 20% reduction of their household income.  Voluntary termination does not work even though the employer gave the employee a chance either to resign or get fired.  Those who were self employed and owned their own business and shut down do not qualify for the FHA Back to Work Extenuating Circumstances due to an Economic Event mortgage program because HUD views a business failure as a calculated risk.  The mortgage applicant needs to have had good credit and timely payment history until the date of the economic event.  A credit score plunge is expected, however, mortgage lenders will like to see that the mortgage applicant has re-established their credit and not have had a single late payment on their credit report after they have gotten another job.  A HUD approved housing counseling course is mandatory and the mortgage applicant cannot apply for a mortgage application until 30 days from the date of the signed HUD counseling certificate.  If you are a home buyer in Illinois, Florida, California, or Indiana and like to learn more about FHA Back to Work Extenuating Circumstances due to an economic event, please contact me at 262-716-8151 or visit me at www.gustancho.com .

Gustan Cho NMLS ID 873293


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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