FHA Loan With Under 620 Credit Score Mortgage Approval

One of our frequently asked questions by homebuyers is can I qualify for an FHA loan with under 620 credit score. FHA mortgages have some of the most forgiving guidelines among mortgage programs. The official program guidelines from the US Department of Housing and Urban Development (HUD) state that borrowers can be eligible for an FHA home loan with FICO credit scores as low as 580 with 3.5% down and as low as 500 with 10% down. Fannie Mae and Freddie Mac loans, in comparison, set their minimum credit score at 620.

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Qualifying for an FHA Mortgage With a Low Credit Score

FHA mortgage guidelines are very flexible compared to other program requirements. You may qualify with a credit score as low as 500. You can get an FHA mortgage 12 months after filing for a Chapter 13 bankruptcy if you make your payments on time and your bankruptcy trustee approves. It’s possible to get an FHA home loan a year after you discharge a Chapter 7 bankruptcy. You must reestablish credit and prove that the bankruptcy was not your fault and was out of your control. That’s rare, however. In most cases, you must wait two years after Chapter 7 bankruptcy to be eligible for FHA mortgage financing. You have to wait three years after a mortgage foreclosure or deed-in-lieu of foreclosure to apply for an FHA home loan. It’s possible to get an FHA mortgage with open collections. It’s possible to get an FHA mortgage with unpaid judgments if you’re making regular, timely payments under an agreement with your creditor.

Related: Credit Score Under 620 FICO

Low Credit Score Does Not Mean “Bad Credit”

Understand that while FHA guidelines allow low credit scores, however, they don’t allow genuinely bad credit. HUD’s guidelines state, “Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments unless there is major derogatory credit on his/her revolving accounts.” In addition, says HUD, “The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments.” There are reasons for low credit scores that have nothing to do with your repayment history. Your score can be low because of limited or short credit history, or because your balances are high or you have too many accounts. You have a much better chance of securing FHA loan approval if your credit score is low but your credit history is okay.

FHA Loan With Under 620 Credit Score: What’s the REAL Minimum Credit Score for an FHA Mortgage?

All borrowers must meet HUD’s minimum qualifications to be eligible for FHA financing. However, lenders can set stricter requirements than the official FHA guidelines. Not all lenders are the same and guidelines can vary widely. The official FHA guidelines might say you can get a home loan with a 580 credit score and 3.5% down, but most lenders have higher minimum credit scores than this — 620, 640, or even higher.

Do All FHA Lenders Have The Same FHA Loan Requirements On FHA Loans?

These stricter requirements are called “lender overlays” and they are perfectly legal. Just because you do not qualify for an FHA loan at one lender does not mean that you cannot qualify at a different lender with no lender overlays. If you’re concerned about qualifying, it’s smart to ask lenders about their overlays before you waste time applying with them. Gustan Cho Associates imposes NO OVERLAYS on home loans including FHA mortgages. So if you’re wondering, ” Can I get a mortgage loan if my credit scores are under 620?” The answer is yes; you’re eligible to apply for an FHA mortgage with a credit score of 580 with 3.5% down and 500 with 10% down.

Related: Mortgage With 580 Credit Score

How to Improve Your Chances of FHA Loan Approval With a Low Credit Score

FHA guidelines state that “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk.

“Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.” If your credit score is low because you don’t use much credit or because you have a lot of accounts, you’ll probably be able to get a mortgage if you meet other program guidelines. But if your score is low because of poor repayment history, you’ll need compensating factors. What are compensating factors that can overcome bad credit history? Here’s a list of the most common ones.

Documented cash reserves

This is money you’ll have after closing on your mortgage that can be used to make your payments. Reserves are measured in months. If your mortgage payment is $1,000 and you have $3,000 in savings, that’s three months of reserves. Having at least two months of reserves after closing is considered a compensating factor.

Minimal increase in housing payment

If your new mortgage payment won’t be much higher than your current rent or mortgage, that’s helpful. As long as you pay your current rent or mortgage on time, you can reasonably argue that you’ll have no problem paying your new mortgage on time.

Conservative use of credit

FHA guidelines state that lenders should not deny a loan application because the borrower doesn’t use a lot of credit. In fact, less debt can be considered a good thing if it frees up more money to pay your mortgage.

Additional income

Some sources of income may count officially when you apply for a home loan. For instance, part-time job income only counts if you’ve been receiving it for two years. Ditto self-employment income, commission income, and bonus income. However, that uncounted income is still there and available to help you pay your home loan. Lenders can’t use it for your qualifying debt-to-income ratios, but they can count it as a compensating factor.

Higher down payment

This one doesn’t make the list of compensating factors but automated underwriting systems (AUS) do calculate your risk based on your income, credit, and down payment. Higher down payments mean less risk to lenders and often a higher down payment can get you a loan approval when the minimum isn’t enough.

FHA Loan With Under 620 Credit Score With Outstanding Collections and Charge Offs

Improve Your Chances of FHA Loan Approval With a Low Credit Score

FHA mortgage borrowers can qualify without paying collections and charge-offs. Do not pay any older collection accounts before applying. This can actually drop your credit score. Ask your loan officer before paying for a newer collection. Paying a medical collection can improve your score because medical collections disappear if you pay them. Paying a newer non-medical collection account may help your score if you’re able to negotiate a “pay for delete” with the collection agency. “Pay for delete” means getting the creditor to agree in writing to remove derogatory credit report entries if you pay the balance. Don’t do anything unless your lender tells you to, however. Borrowers can get FHA loan approval with outstanding collection and charge-off accounts. Judgments are different from collection accounts. Paying off a judgment will not drop your credit scores. Your lender may require this before you can close on your mortgage.

Please consult the advice of a mortgage broker/banker prior to taking any measures on paying collections, charge-offs, judgments. If you have any questions about the contents of this article and/or other mortgage-related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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FHA loans for borrowers with low credit scores

Not all lenders have the same lending requirements for government-backed and conventional loans. This holds especially true for FHA home loans. FHA loans popular with borrowers who have some qualifying hurdles.  These include lower credit scores, smaller down payments, and higher debt-to-income ratios. It is easier to get an approve/eligible decision from an automated underwriting system, even with a low credit score, through the FHA program than most other mortgages. Borrowers must meet the minimum HUD mortgage guidelines for FHA loans. However, each lender can add stricter requirements called lender overlays. These overlays can make it harder for applicants with bad credit scores to get loan approval. Most lenders add some overlays. However, Gustan Cho Associates has no lender overlays for government or conventional loans. HUD agency guidelines allow FHA approval for borrowers with credit scores as low as 500.

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Getting FHA Mortgage Approval With Low Credit Scores

Over 75% of our borrowers at Gustan Cho Associates Mortgage Group are folks who either have gotten a last-minute loan denial or are stressing over their mortgage process because of lender overlays. Why is it that lenders have different credit score requirements? Most banks require a 640 credit score while most mortgage companies set minimum credit scores at 620. However, the U.S. Department of Housing and Urban Development (HUD), the parent of FHA, established the minimum credit score of 580 for borrowers to qualify for 3.5% down payment home purchase FHA Loans. At Gustan Cho Associates, applicants can qualify for FHA loans with credit scores under 620.

FHA Guidelines for Credit Scores Under 620

Most FHA mortgage applications are underwritten by a software called Automated Underwriting Systems, or AUS. The AUS weighs all factors in an application including debt-to-income ratio, credit score, income, down payment, and savings (called reserves). As long as the AUS issues an approve/eligible recommendation, you can get loan approval from Gustan Cho Associates. However, if the software cannot issue an approval, it will come back with either a loan denial (refer with caution) or a requirement for manual underwriting. An application can require manual underwriting by a human if the system doesn’t have enough information (for instance, your credit report has no score). If your application cannot go through AUS, you’ll have a much harder time getting an FHA mortgage approval with a low credit score.

Can You Qualify for FHA Loans With Low Credit Scores and Collections?

The Federal Housing Administration does not require you to pay all collections before closing on your loan. Charge-offs and older late payments are acceptable. However, recent late payments can be a problem. Mortgage underwriters do not want to see late payments in the past 12 months. You might be able to secure approval if there are extenuating circumstances. However, a human underwriter has to look at the file. That’s because an AUS has no way of knowing if a late payment was your fault or not. Never pay an older collection account because it reactivates the derogatory credit item and makes it new again. Newer items on credit reports impact scores much more than older items. Information on the credit reports is included in decisions by Automated Underwriting Systems.

Contact Us for FHA Loans With No Overlays

A good percentage of our borrowers have under 620 credit scores.

If you have been denied a home loan by a bank, mortgage banker, or mortgage broker, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] A good percentage of our borrowers have under 620 credit scores. And our borrowers can close their mortgage loans once they get an approve/eligible decision by an AUS. All of our pre-approvals are full credit approvals underwritten and signed off by our mortgage underwriters.

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