FHA Loans Versus Non-QM Loans for Bad Credit Borrowers

Gustan Cho Associates are mortgage brokers licensed in 48 states

We will be comparing FHA loans versus non-QM loans for homebuyers with credit/income issues and have you fully understand the comparison of the two. The two most popular programs for homebuyers with bad credit with low credit scores are FHA and Non-QM loans. There are dozens of new and updated non-QM mortgage loan programs that have been launched for 2022. HUD, the government agency is in charge of the Federal Housing Administration (FHA). FHA loans are the choice for homebuyers with bad credit and low credit scores due to the fact it only requires a 3.5% down payment versus non-QM loans.

FHA Loans Versus Non-QM Loans For Bad Credit Borrowers

Non-QM mortgages require a 10% to a 30% down payment versus FHA loans’ down payment requirements of 3.5% down payment on a home purchase. The amount of down payment on non-QM loans depends on the borrowers’ credit scores, property type, seasoning after bankruptcy, and/or a housing event. Non-QM loans are great for bad credit borrowers because of their lenient and open-minded lenient guidelines by non-QM wholesale lenders.

FHA Loans Versus Non-QM Loans After Bankruptcy Due To No Waiting Period Requirements

There are instances where homebuyers need to go with non-QM loans when borrowers cannot meet the waiting period requirements after bankruptcy and foreclosure. Non-QM loans one day out of bankruptcy and foreclosure do not mandate any waiting period requirements while FHA loans require a two-year waiting period after bankruptcy and/or foreclosure. In this blog, we will go over the mortgage options on FHA loans versus non-QM loans with bad credit and see what options are best for you.

Housing Market Forecast For 2022

The housing market has been rocking nationwide. Due to the spike in home prices with no sign of a housing correction, HUD and the FHFA have increased FHA loan limits and conforming limits for six years in a row. The housing market forecast for 2022 remains strong despite increasing mortgage rates and high inflation rates. Certain states have much higher home values than the rest of the nation. Many areas with high home prices have been designated as high-cost areas. FHA and conventional loans have higher loan limits on FHA and conforming loans. FHA high balance loans and high-balance conforming loans have high-balance loan limit caps at $970,800 whereas, in regular areas, the maximum conforming loan limits are capped at $647,200 on conforming loans. The 2022 FHA loan limits in regular areas are capped at $422,680.

High-Balance Jumbo Loans In High-Cost Areas

California is one of the largest states in the nation. The state of California is also one of the most populous states in the United States. California has one of the highest property values in the country. California, Hawaii, Oregon, Rhode Island, Vermont, Maryland, Washington DC, New York, New Jersey, Hawaii, Arizona, Virginia, Connecticut, and Alaska are among the states with the highest property values. Due to the high property values in California, many counties in the state are considered high-cost areas. The average FHA Loans size in the continental U.S. is $390,890. The average loan size in the state of California is $784,700 for a similar and like property. In this article, we will cover and discuss qualifying for FHA loans versus non-QM loans with bad credit.

FHA Loans Versus Non-QM Loans With Bad Credit: Comparing Mortgage Options

The Federal Housing Administration (FHA) is a subsidiary of the United States Department Of Housing And Urban Development (HUD).

The Federal Housing Administration (FHA) is a subsidiary of the United States Department Of Housing And Urban Development (HUD). Federal Housing Administration, also known as FHA, is not a mortgage company nor does it originate, process, underwrite, fund, or service FHA Loans. Most folks have heard of FHA loans. Most folks do not realize HUD is a government agency that has nothing to do with funding FHA Loans. The mission of HUD is to promote and help hard-working American families become homeowners by making FHA loans easy to qualify with low down payments and less than perfect credit.

The Role Of HUD On FHA Loans

The main function and role of HUD are to insure FHA Loans. HUD insures loans that are originated, processed, underwritten, and funded by private banks and mortgage companies who are HUD-approved lenders. HUD insures lenders against default and losses in the event borrowers default on their FHA loans. In order for HUD to insure FHA Loans from private lenders, the FHA loans need to meet the minimum HUD guidelines for FHA loans. Qualifying for FHA loans with bad credit is definitely doable because FHA has lenient mortgage lending guidelines.

FHA Credit Score Requirements

HUD requires a minimum of a 580 FICO credit score to qualify for a 3.5% down payment home purchase mortgage loan. HUD allows borrowers under 580 FICO are eligible to qualify for an FHA loan. However, borrowers with under 580 credit scores require a 10% down payment versus a 3.5% down payment.

FHA Down Payment Requirements For Borrowers With Under 580 Credit Scores

If the borrower's credit scores are below 580 credit scores, HUD considers borrowers higher-risk borrowers.

If the borrower’s credit scores are below 580 credit scores, HUD considers borrowers higher-risk borrowers. This is considered to have an added layered risk. With borrowers with credit scores under 580 FICO, the mortgage rates are higher than those with over 580 FICO or higher. Debt to income ratio requirements is normally lower to get an approve/eligible per automated underwriting system for FHA borrowers with credit scores under 580 FICO.

FHA Debt To Income Ratio Requirements

In general, HUD will cap the front-end debt to income ratio at 46.9% and the back-end debt to income ratio at 56.9%. High debt-to-income ratios are alarming for lenders due to concerns about the borrower’s ability to repay their new mortgage payments.  Rental Verification may be required for borrowers by many mortgage underwriters who have concerns about the borrower’s ability to repay their new mortgage payments. VOR (Verification Of Rent) may be required if the Automated Underwriting System conditions it.

FHA Loan Requirements With With Late Payments

Borrowers can qualify for FHA loans with bad credit with low credit scores. However, borrowers cannot have late payments in the past 12 months, especially a mortgage late payment. HUD understands that people can have gone through periods of bad credit due to extenuating circumstances such as periods of unemployment, divorce, and medical issues.

Rebuilding Credit To Qualify For a Mortgage

FHA wants to see borrowers who have recovered, re-established their credit. Borrowers need to have been timely on their monthly minimum payments for the past 12 months. One or two late payments in the past 12 months may not be a deal killer with a good letter of explanation. Multiple late payments will be an issue. For borrowers who had multiple recent late payments and want to qualify for an FHA loan, the best advice I can give is to add new credit such as secured credit cards. Let the new positive credit drown the negative credit and let it season before applying for an FHA loan.

FHA Loans For Bad Credit With Collection Accounts

California home buyers can qualify for FHA Loans Bad Credit California With Collection Accounts without having to pay off the collection accounts.

Homebuyers can qualify for FHA and Non-QM loans for bad credit with low credit scores. Both loan programs do not require borrowers to pay outstanding collection and/or charged-off accounts. On FHA loans, if the unpaid collection accounts are non-medical and total $2,000 or more, then 5% of the unpaid collection account balance will be used to calculate borrowers’ debt to income ratios. This holds true unless a written payment agreement is made with the creditor.

Written Payment Agreement With Creditor on Outstanding Debts

If a written payment agreement is made between the creditor and debtor, the agreed monthly payment will be used to calculate the debt to income ratios. Medical collection accounts and charge offs do not matter and are exempt from this rule. Depending on the non-QM lender, they may just exclude collections and/or credit disputes or may have their own individual rules on derogatory credit tradelines. Everything is negotiable on non-QM and specialty alternative mortgage loan programs.

Contact Us To Go Over Mortgage Options On FHA Loans Versus Non-QM Loans With Bad Credit

Homebuyers who need to qualify for bad credit mortgages with lower credit scores with a mortgage company licensed in multiple states with no lender overlays on FHA loans and are correspondent lenders/brokers on non-QM loans, 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, on evenings, weekends, and holidays. Gustan Cho Associates has a national reputation for not having lender overlays on government and conventional loans. We have dozens of lending partnerships with non-QM wholesale lenders so we have many alternative loan programs available for our clients. We have been known to be a one-stop lending shop for being able to do loans other mortgage companies cannot do. Some of our more popular non-QM loan programs are no-doc mortgages, bank statement loans, asset-depletion loans, 90% LTV jumbo loans, and dozens of other non-QM mortgages on owner-occupant homes, and second homes, and investment properties.