FHA Loan With Low Credit Scores With No Overlays

This Article Is About Qualifying For An FHA Loan With Low Credit Scores With No Overlays

Many homebuyers, especially first-time homebuyers do not realize they can qualify for an FHA Loan with low credit scores. Not all lenders have the same credit score requirements for FHA Loans. All lenders need to meet FHA Guidelines per HUD 4000.1 FHA Handbook. However, lenders can have higher lending requirements above and beyond those of HUD Guidelines. These additional mortgage guidelines by lenders are called mortgage overlays. FHA minimum credit score requirements for a 3.5% down payment home purchase is 580. However, most mortgage lenders have credit score overlays where they require 620 to 640 credit scores

Qualifying With One Lender But Not Another Lender Due To Lender Overlays

How to qualify with one lender but not another lender due to lender overlays

I have many borrowers who contact my offices every day and tell me that they were told by other lenders that they do not qualify for FHA Loan with low credit scores:

  • They are often told they need at least 620 credit scores to qualify
  • Some borrowers are even told that they need a 640 credit score
  • This is not true
  • FHA Guidelines on Credit Score requirements for a 3.5% down payment home purchase is 580 Credit Score
  • Lenders can have higher standards
  • They require higher credit scores than the 580 Credit Score FHA requires
  • The higher credit score requirement asked by lenders is called lender overlays on credit scores
  • This is perfectly legal to do
  • FHA Lenders do need to meet the minimum FHA Guidelines
  • But can set higher credit and income standards than those imposed by FHA

Again, this higher standard is called lender overlays.

Role Of Federal Housing Administration

One of the main objectives of the Federal Housing Administration, FHA, is to promote homeownership for first-time homebuyers and consumers who had prior bad credit and are seeking mortgages with low credit scores.

  • A home buyer can qualify for an FHA insured home loan with a 3.5% down payment with a credit score as low as 580
  • FHA allows home buyers with credit scores under 580 to qualify for FHA loans as long as the home buyer has a 10% down payment

As long as borrowers have documented income, they will eventually qualify for FHA Loans with low credit scores.

FHA Loan With Low Credit Scores Versus Bad Credit

What is a low credit FHA loan versus bad credit?

Mortgage loan borrowers seeking a mortgage with low credit scores do not necessarily have bad credit.

  • Borrowers can have low credit scores with good credit
  • How?
  • Borrowers with no active credit tradelines, the chances are credit scores will be low
  • Consumers can have no history of delinquent payments, no prior bankruptcy, no foreclosures on a credit report and still have credit scores under 600
  • Borrowers with bad credit can have high credit scores
  • This is as long as the bad credit history has been aged and they have active credit tradelines
  • Consumers with a prior bankruptcy, foreclosure, charge offs and unpaid collection accounts can have credit scores of higher than 700 as long as they have acted on-time credit tradelines
  • The older the derogatory credit item is, the less impact it has on the consumer’s credit scores
  • Consumers can have low credit scores with perfect credit if credit cards are maxed out
  • By paying down credit cards, credit scores will improve right away
  • Many times by the next billing cycle

Borrowers can have high credit scores but will not qualify for an FHA Loan if they had many late payments in the past 12 months or more than one late payment on a home mortgage. FHA Loan With Low Credit Scores is not the only issue when it comes to qualifying for FHA Loans. Lenders will review the overall credit report of the borrower.

Importance Of Credit Scores

Credit scores range from a low of 300 to 850. 

  • The higher the credit score, the better the terms and mortgage rates borrowers will get
  • Homebuyers or homeowners looking for a purchase or a refinance loan should start looking for improving their credit scores
  • They should review their credit report for any errors and see if they can maximize their credit scores
  • Credit scores are what determine whether or not borrowers will qualify for a mortgage and determine mortgage rates

A high credit score is 740 or higher:

  • an excellent credit score is 700 to 739
  • a good credit score is 640 to 699
  • poor credit scores are 600 to 649
  • bad credit scores are under 600

Statistics show that more than 33% of home loans were closed with borrowers with credit scores under 700  in 2020:

  • A year earlier in 2019, 27% of the mortgage loans were from borrowers with credit scores under 700

Qualifying For FHA Loan With Low Credit Scores

How to qualify for an FHA loan with a low credit score

FHA loan programs are much more generous in catering to home buyers who need a mortgage with low credit scores.

  • Minimum credit score requirements for a 3.5% down payment FHA home loan is 580
  • Whereas a minimum credit score of 620 is needed for homebuyers seeking a conventional loan. 
  • Homebuyers with credit scores under 580 can qualify for FHA loans as long as they have a 10% down payment

Borrowers who need a mortgage with low credit scores, please contact Gustan Cho Associates at 262-716-8151. Text us for a faster response. Or email us at gcho@loancabin.com. We are available 7 days a week. Gustan Cho Associates Mortgage Group has a five-star national reputation and is known for being able to close loans others can’t. Gustan Cho Associates has a national reputation and is known for its no overlays on government and conventional loans.

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