Mortgage Options For FHA Loans For Bad Credit

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will discuss and cover FHA loans for bad credit with low credit scores on home purchase and refinance transactions. FHA loans are government-backed mortgage loans that are originated, processed, underwritten, and funded by banks and private mortgage lenders. HUD is the parent of FHA loans. HUD-approved lenders are more than eager to offer FHA loans to qualified homebuyers with little down payment and less than perfect credit. HUD, the parent of FHA, has the most lenient for bad credit and low credit scores. FHA home loans are best for homebuyers with bad credit, outstanding collections, charged-off accounts, prior bankruptcy, and foreclosure. In the following paragraphs, we will explain qualifying for FHA loans for bad credit and low credit scores.

FHA 500 Credit Score Lenders

FHA 500 Credit Score Lenders

Not all FHA lenders have the same lending requirements on FHA loans. The best FHA 500 credit score lenders are mortgage companies with no lender overlays. Homebuyers can qualify for FHA loans with credit scores down to 500 FICO. You do not need to pay outstanding collection accounts and/or charged-offs to qualify for FHA loans for bad credit with low credit scores. The following lenders are the best FHA lenders for bad credit:

FHA Lenders For Bad Credit

The seven top seven bad credit mortgage lenders for FHA loans:

1.) Quicken Loans

2.) Guaranteed Rate

3.) Providence Home Lending

4.) Ditech Home Loans

5.) Easy Mortgage Company

6.) Smart Financial Services

7.) Madison Mortgage Guys

The key to getting an approve/eligible per automated underwriting system (AUS) on FHA loans for bad credit with low credit scores is to have been timely on all monthly payments for the past 12 months. Borrowers who cannot get an automated underwriting system (AUS) and get a refer/eligible can be eligible for manual underwriting. We will cover more on manual underwriting later in this blog.

What Is The Minimum FHA Loan Credit Score Requirement?

The minimum credit score to qualify for an FHA loan is 500 FICO. For homebuyers with credit scores lower than 580 and down to 500 FICO, a 10% down payment is required. To qualify for a 3.5% down payment home purchase FHA loan, you need a 580 credit score. HUD allows borrowers with credit scores down to a 500 FICO to qualify for an FHA loan. Even though HUD allows borrowers with credit scores under 580 to require a 10% down payment, they need to be eligible by getting an automated underwriting system approval or qualify for manual underwriting guidelines. If borrowers cannot get an approve/eligible per automated underwriting system and get a refer/eligible per AUS, the borrower may be eligible for manual underwriting.

Read More on Minimum Credit Score Mortgage Guidelines

FHA Loan Guidelines on Recent Late Payments

HUD has the most lenient mortgage guidelines on FHA loans than any other loan program. You can have outstanding collections and charged-off accounts and qualify for FHA loans. However, in order for you to get an approve/eligible per the automated underwriting system, you need to have timely payments in the past 12 months. To be eligible for manual underwriting, you need to have timely payments in the past 24 months. There are instances where borrowers can get an approve/eligible per automated underwriting system with late payments in the past 12 months if they put more money down. A 10% to 20% down payment will most likely get an approve/eligible per AUS with recent late payments in the past 12 months.

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What Mortgage Options Are For Bad Credit?

What Mortgage Options Are For Bad Credit?

There are three government loan programs: FHA, VA, and USDA loans. FHA loans are one of the three government loans available. Government loans are for owner-occupant home financing only. Conventional loans and FHA loans are the two most popular loan programs in the nation. Borrowers with prior bad credit, outstanding collections, charged-off accounts, and higher debt to income ratio can benefit more from FHA versus conventional loans. FHA loans are more lenient for borrowers with bad credit and credit scores down to 500 FICO.

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Homebuyers can qualify for FHA loans with a 500 credit score. However, not all mortgage lenders will accept borrowers with credit scores down to 500 FICO. Homebuyers can qualify for FHA 500 credit score. HUD is the best mortgage loan program for borrowers with FHA 500 credit scores. Borrowers need to realize not all mortgage companies have the same lending guidelines for FHA loans for bad credit and FHA 500 credit scores. Lenders can have overlays on credit scores. Lender overlays are additional mortgage guidelines above the minimum HUD agency mortgage guidelines.

Read More on FHA Lenders For Under 600 FICO Homebuyers

The Best Mortgage Lenders For FHA Loans For Bad Credit

The United States Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). FHA has nothing to do with the origination and funding of FHA loans. The mission and role of FHA are to guarantee HUD-Approved Lenders in the event Borrowers default on their FHA Loans. FHA will insure the lender on the loss due to borrower default. In order for HUD to insure FHA home loans, banks and lenders need to follow HUD Guidelines.

Best Mortgage Lenders For FHA Loans With Low Credit Scores

The best lender to go to qualify for FHA Loans For Bad Credit are lenders like Gustan Cho Associates where the lender has no lender overlays on government and conventional loans. More and more borrowers are choosing FHA loans versus any other loan program. FHA loans are more popular now than ever. FHA loans are a great home loan program for making the dream of homeownership available to first-time home buyers and those who have had prior bad credit.

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Is It Easy To Qualify For FHA Loans

Qualifying For FHA loans has much more lenient qualifying standards than conventional loans. Borrowers can qualify for an FHA loan with credit scores down to a 500 FICO. To qualify for an FHA loan with a 3.5% down payment, you need a 580 credit score. Borrowers with credit scores under 580 FICO and down to a 500 credit score, you need a 10% down payment. Borrowers with high debt to income ratios can qualify for FHA loans where otherwise they could not have qualified for other loan programs like conventional loans.

FHA Loans For 500 to 620 FICO Borrowers

Not All FHA Lenders Have the Same Guidelines

Every mortgage lender has different mortgage lending guidelines for FHA loans. One lender might require a minimum credit score of 640 FICO for their borrowers while others might have a 620 FICO requirement. HUD minimum credit score requirement for 3.5% down payment FHA Mortgages is 580. There are lenders that will even take a borrower with FICO scores as low as 500. Borrowers who get denied by a lender for an FHA loan due to overlays can qualify for FHA Loans with a Lender with no lender overlays. Every mortgage lender has different overlays when it comes to approving FHA loans. Gustan Cho Associates has no overlays on government and conventional loans.

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FHA Loan Guidelines on Collection Accounts

There are lenders that will approve borrowers who have open and unpaid collections. FHA categorizes collection accounts into two categories. Medical collections and non-medical collections. On non-medical collections with outstanding balances of $2,000 or higher, mortgage underwriters will take 5% of the outstanding collection balance and use it as a hypothetical debt. You do not have to pay the collection account but 5% of the outstanding collection account is used as a hypothetical debt for debt-to-income ratio calculations. Non-medical collections and charged-off accounts do not count. Most lenders will not approve anyone who has an unsatisfied judgment due to overlays on collections. HUD Guidelines on collections and charge-off accounts do not require that borrowers need to pay outstanding collections and charge-offs. Judgments and Tax Liens need to be addressed.

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FHA Loan Guidelines With Judgments

Homebuyers can qualify for FHA loans with outstanding judgments without having to pay the judgment off. Borrowers can do the following to be eligible to qualify for an FHA loan with unpaid judgments:

  • Pay the full judgment amount
  • Settle with the judgment creditors for less than what the judgment is owed
  • Enter into a written payment agreement and have made three timely monthly payments

You cannot pay the three monthly payments in full once you have entered into the written payment agreement. Judgments that have passed the statute of limitations can be exempt. However, the borrower needs to make sure the court has expunged the judgment that has passed the statute of limitations.

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Can You Qualify For an FHA Loan With a Tax Lien?

Borrowers can qualify for an FHA loan with a federal and/or state tax lien without having to pay the outstanding lien in full. The whole tax lien does not have to be paid. A payment agreement will be required. Homebuyers with unpaid federal and/or state tax liens need to either have a written payment agreement with the IRS and/or state revenue department. Copies of canceled checks for borrowers with payment agreements with the Internal Revenue Service and/or state revenue department. Borrowers need to have made three months of timely payments after the executed written payment agreement. The three months of monthly payments cannot be paid at once for the sake of qualifying for an FHA loan. The three months of payments on the tax lien need to be paid every month for the three months after the written payment agreement.

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FHA Loans With High Debt To Income Ratio

What Is The Minimum Credit Score on FHA Loans?

There are many folks who have great credit and have great income but a lot of debts. I have seen borrowers with credit scores of over 800 FICO and long job longevity who could not qualify for a conventional loan but qualify for FHA loans due to higher debt-to-income ratios. Fannie Mae caps debt to income back-end ratio at 50%. Freddie Mac caps DTI at 50%. HUD Guidelines On DTI is 46.9% front end and 56.9% back end to get an approve/eligible. In cases like these, conventional loan borrowers need to turn to FHA loans.

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FHA Jumbo Loans in High-Cost Areas

Many changes have happened with FHA Loan Programs from the time this mortgage blog article was written and published. Now the FHA Loan Limit is $422,680 in most standard areas with median-priced home values in the United States. There are areas in the United States that have higher home prices. These areas are called high-cost areas and/or high-cost counties. Many areas in California are deemed high-cost areas. The FHA loan limits in most counties in California that are classified as high-cost areas are $970,800 for single-family homes.  Any FHA loan that surpasses the traditional FHA loan limit of $420,680 is called FHA jumbo loans or FHA high-balance loans.

FHA Jumbo Loans in High-Cost Counties

FHA Loan Limits in Standard and High-Cost Areas

FHA loan limits are higher for FHA Loans In Chicago and its surrounding suburbs, FHA Loan Limits in standard median-priced countries in the United States are at $420,680 for single-family units. Many homebuyers who need to purchase a higher-priced home can be priced out of the maximum FHA loan limit and may need to look at other options like conventional or non-QM loans.  If that is the case, they need to choose conventional loan financing where the standard conventional loan limits on median-priced counties. The loan limit on conventional loans is $647,200 in median-priced conforming loan limit counties. HUD and the FHFA have higher loan limits in high-cost areas. High-cost areas have higher loan limits. High-balance FHA jumbo loans are $970,800 in high-cost areas on single-family homes. High-balance conforming loans in high-cost areas is $970,800 in high-cost areas.

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What Are The Basic Requirements For an FHA Loan?

FHA loans for bad credit eligibility requirements and guidelines have been updated for 2022. The coronavirus outbreak in February 2020 has changed the mortgage markets. Investors of mortgages on the secondary mortgage bond markets do not want to take risks on mortgages. With the Central Bank lowering interest rates to zero percent, investors in the secondary mortgage markets do not have any appetite for higher-risk mortgages. By higher-risk mortgages, it means mortgages with borrowers with lower credit scores and bad credit.

Read More on HUD Guidelines on FHA Loans

Can I Shop For The Best Mortgage Rates With Bad Credit?

Due to the attitude of mortgage bond buyers on the secondary markets, most mortgage companies have increased their credit score requirements to higher levels. Most mortgage companies will not accept any borrowers who do not have a 640 to 660 credit score and added a bunch of lender overlays. However, Gustan Cho Associates have zero lender overlays on government and conventional loans. We still accept and approve borrowers with credit scores down to 500 FICO as long as they can get an approve/eligible per the automated underwriting system.

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How Long Does It Take To Get an FHA Loan?

How Long Does It Take To Get an FHA Loan?

It normally takes no more than 30 days to close on an FHA loan from application til closing. The mortgage process on FHA loans is straightforward forward starting with the qualification and pre-approval process. Once armed with a pre-approval letter, the homebuyer can go and shop for a home. Once the homebuyer enters into a real estate purchase contract, the loan process begins. The loan officer will work with a mortgage processor and collect updated docs to prepare the file for underwriting.

Steps of The Mortgage Underwriting Process

Once all the docs have been collected, the mortgage processor will prepare the documents for the underwriter. At the same time, the processor will order the home appraisal. Once the mortgage underwriter has reviewed the file, the underwriter will issue a conditional loan approval. The file goes back to the processor. The processor will clear conditions. Once all the conditions have been cleared, the file is submitted to the same underwriter for a clear to close. Once the underwriter issues a clear to close, the lender is ready to fund the loan. The lender’s closing department works closely with the title company in scheduling the closing.

Best Lenders For FHA Loans For Bad Credit

Not all mortgage lenders are the same. Some lenders have higher lending requirements, called lender overlays than others on FHA loans. Just because you do not qualify with one lender does not mean you are not eligible to qualify for an FHA loan with a different lender. Remember HUD did not change its minimum agency guidelines. It is the lenders that have increased credit score requirements and added stricter lender overlays. This trend is going to continue going into 2022 since investors in the secondary mortgage bond markets have no appetite for borrowers with under 680 credit scores.

Read More on Mortgage Process From Application to Clear to Close

What Credit Score Do I Need To Buy a House?

FHA loans are very popular among borrowers with credit scores down to 500 FICO. For FHA loans, many lenders now have lender overlays on credit scores and will require higher than 640 to 660 credit scores on FHA loans. This is not HUD Agency Guidelines. HUD, the parent of FHA loans, did not change its minimum credit score requirements. It is still 580 credit scores to qualify for a 3,5% down payment home purchase FHA loan. HUD still allows for borrowers with credit scores down to 500 FICO to qualify for FHA loans. However, HUD requires any borrowers with under 580 credit scores a 10% down payment versus a 3.5% down payment.

How Much Money Do I Need To Buy a House?

For borrowers with under a 580 credit score who does not have the 10% down payment, Gustan Cho Associates can help them get to a 580 credit score. The team at Gustan Cho Associates are experts in helping borrowers boost their credit scores and re-establish their credit. Even though HUD did not change its agency mortgage guidelines, most lenders added tighter lending restrictions on FHA loans as well as other mortgage programs. The good news is that Gustan Cho Associates has not added any lender overlays before, during, and after the COVID-19 pandemic. The business model at Gustan Cho Associates is not having any lender overlays on government and conventional loans.

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FHA Loans For First-Time Homebuyers With Bad Credit

The coronavirus outbreak in February 2020 has changed the mortgage markets for borrowers with bad credit and lower credit scores. The good news is borrowers with great credit and higher credit scores can get the lowest mortgage rates in the history of the United States. Mortgage rates on 30-year fixed-rate mortgages are under 3.0%. Prime borrowers with no loan level pricing adjustments can get prime rates as low as 2.25%. Homebuyers can still qualify for bad credit FHA loans. However, before you have a loan officer pull credit, make sure the types of lender overlays they have.

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