FHA Loans vs VA Loans: Comparing Mortgage Options

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this article, we will be comparing FHA loans vs VA loans. VA loans by far are the best mortgage loan program in the nation. The U.S. Department of Veterans Affairs is the federal government agency administering the agency mortgage guidelines on VA loans. The role of the Veterans Administration (VA) and the U.S. Department of Housing and Urban Development (HUD) is to insure and partially guarantee banks, credit unions, and mortgage companies in the event borrowers default on VA loans for the VA and FHA loans for HUD. There is no doubt that FHA loans vs VA loans are no comparison in benefits. However, there are instances when homebuyers need to take FHA loans vs VA loans in cases where they may need non-occupant co-borrowers or cannot get an approve/eligible per automated underwriting system per AUS on VA loans. 

Is A VA Loan Always The Best Option?

VA loans versus FHA loans

VA loans are hands down the best mortgage loan program in the United States for homebuyers. There are so much more benefits of VA loans vs FHA loans. Some of the many benefits of VA loans vs FHA loans are 100% financing by lenders with no down payment required, no mortgage insurance premium, and no maximum loan limit. There is the VA funding fee which can be more than the upfront FHA mortgage insurance premium. FHA loans vs VA loans come into play when the VA loan borrower may need a non-married spouse or non-occupant co-borrower to purchase a home due to limited income. One of the great benefits of FHA loans vs VA loans is FHA allows non-occupant co-borrowers who are related to the main borrower by blood, marriage, and/or law. VA only allows a married spouse as a co-borrower.

VA Loan Credit Score Requirements

There are no minimum credit score requirements on VA loans. However, the floor on the minimum credit score on VA loans can be said to be 500 FICO. There are no maximum debt-to-income ratio caps on VA loans. Gustan Cho Associates has gotten an approve/eligible per automated underwriting system (AUS) with over 60% DTI and credit scores under 550 FICO on VA loans. However, the key to getting an automated underwriting system findings approval is for borrowers to have strong residual income. There are instances where borrowers may need to opt for FHA loans vs VA loans. We will discuss the reasons why there are times homebuyers with a certificate of eligibility (COE) needs to go with FHA loans vs VA loans later in this blog. 

VA DTI Mortgage Calculator

Why Do Homebuyers Need To Go With FHA Loans vs VA Loans?

There are instances where borrowers need to opt to go with FHA loans vs VA loans because they can get an approve/eligible per automated underwriting system (AUS) on FHA loans but NOT an AUS approval on VA loans. It is easier to get an approve/eligible per automated underwriting system (AUS) on FHA loans vs VA loans with lower credit scores, recent late payments, large outstanding collections, and charged-off accounts. There are instances for borrowers with bad credit and lower credit scores who can get automated approval on FHA loans but not on VA loans.

Is A VA Loan More Strict Than an FHA Loan?

The algorithm on VA loans on AUS is less forgiving than the algorithm on FHA loans. For example, HUD, the parent of FHA, loves large down payments on FHA loans. Borrowers with recent late payments in the past 12 months and credit scores as low as 500 FICO can easily get an automated underwriting system (AUS) approval with a 20% down payment. However, the same borrower with recent late payments in the past 12 months and credit scores down to 500 FICO cannot get an approve/eligible per AUS with a 20% down payment. The Veterans Administration for some odd reason does not care about the large down payment on VA loans with recent late payments and low credit scores like HUD likes it on FHA loans.

How Are FHA and VA Loans Compare To One Another?

Only active and/or retired members of the U.S. Armed Services and spouses of eligible veterans with a valid VA certificate of eligibility (COE) are eligible and entitled to qualify for a VA loan. The VA has a one-time VA funding fee that can be rolled into the balance of the VA loan. There are instances where homebuyers or homeowners cannot qualify for a VA loan for one reason or another and FHA loans is the second option for their choice of a mortgage loan. Some of the reasons why borrowers with VA COE Entitlement choose to go with an FHA loan vs VA loans is when they cannot get an approve/eligible per automated underwriting system on VA loans but can get an automated approval on an FHA loan.

VA Loans Vs FHA Loan Infographic

Is It More Strict To Get Automated Underwriting System Approval Than FHA Loans?

VA and FHA loans both allow for manual underwriting. In general, FHA loans vs VA loans have a more lax AUS algorithm when it comes to getting an approve/eligible per AUS with a larger down payment for late payments. However, both VA and FHA manual underwriting guidelines require timely payments in the past 12 months. 

How To Get A Refer/Eligible To an AUS Approval on FHA Loans

If a borrower cannot get an approve/eligible per automated underwriting system (AUS) on VA loans but can get an approve/eligible per AUS on FHA loans, the veteran can only go with an FHA loan. The above case scenario of a 20% down payment is an illustration. Normally, the loan officer would start with a 5% down payment, then keep on increasing the down payment until he is able to get an approve/eligible per automated underwriting system (AUS). From our experience, you can definitely get an approve/eligible per AUS on FHA loans with the combination of recent late payments, credit scores down to 500 FICO, and outstanding collection and charged-off accounts with a substantial down payment between a 10% to a 20%.

FHA DTI Mortgage Calculator

VA Loans With 500 FICO Scores 

Both federal agencies do not originate, process, underwrite, fund, or service home loans. The role of the VA and HUD is to insure lenders if they sustain a loss through borrowers defaulting on their VA and/or FHA loans. Lenders offer VA loans with no down payment required by homebuyers and 100% financing with no mortgage insurance premium at competitive mortgage rates. However, not every homebuyer can qualify for a VA loan. VA loans have no minimum credit score requirements, no maximum debt-to-income ratio, no annual mortgage insurance premium, no maximum loan limit, and competitive mortgage rates. But why are we then comparing FHA loans vs VA loans? We will soon explain why. All the signs tell there is no comparison comparing FHA loans vs VA loans. We will explain why some veterans do not have a choice between going with FHA loans vs VA loans.

FHA Loans With Credit Scores Down To 500 FICO

FHA Loans With 500 Credit Scores Mortgage Guidelines allows homebuyers and homeowners to qualify for purchase and/or refinance FHA loans with an approve/eligible per automated underwriting system or manual underwriting. If the borrower needs the file to get downgraded to manual underwriting, FHA manual underwriting guidelines apply. HUD manual underwriting guidelines require several lending requirements. However, the first and most important FHA manual underwriting requirement is to have been timely in the past 24 months on all credit tradelines. We will discuss more in detail the HUD manual underwriting guidelines later in this blog. Borrowers who cannot get an approve/eligible per AUS with a 3.5% down payment due to recent late payments in the past 12 months and cannot qualify for manual underwriting due to the recent payment history, putting a 10% to 20% down payment will render an AUS approval.

FHA Credit Score Guidelines

The key to getting an automated AUS approval is to have timely payments in the past 12 months and meet all HUD minimum agency mortgage guidelines. Homebuyers need a 580 credit score to qualify for a 3.5% down payment home purchase FHA home loan. HUD, the parent of FHA allows borrowers with credit scores down to a 500 FICO to be eligible for an FHA loan. Per HUD agency guidelines, borrowers with credit scores under 580 and down to a 500 credit score require a 10% vs a 3.5% down payment. Eligible homebuyers can qualify for VA loans with credit scores down to 500 FICO with 100% financing and no money down.

FHA Loan For First-Time Homebuyers With Bad Credit

FHA Loans are one of the most popular loan programs in the U.S. FHA Loans are common mortgages for first-time homebuyers, buyers with bad credit, higher debt to income ratio borrowers, and borrowers after bankruptcy or foreclosure. HUD, the parent of FHA, is not a lender. HUD created FHA to insure home loans to private lenders. Lenders get a government guarantee by HUD in the event borrowers default on their FHA Loans.

FHA Loans With High Debt-To-Income Ratio

HUD will insure and partially cover the loss by the lender in the event a borrower defaults and forecloses on their FHA loan. Due to this government guarantee, lenders are able to offer home loans to buyers with lower credit scores, bad credit, and high DTI with a 3.5% down payment, lenient mortgage requirements, and competitive mortgage rates. Borrowers can qualify for FHA Loans With 500 Credit Scores at Gustan Cho Associates if they meet the minimum mortgage guidelines of the U.S. Department of Housing and Urban Development (HUD).

What Is The Lowest Credit Score HUD Will Accept on FHA Loans?

The lowest credit score HUD, the parent of FHA will accept is down to a 500 FICO. However, for borrowers with credit scores between 500 to 579 FICO, HUD requires a 10% down payment. The minimum credit score requirement for FHA loans with a 3.5% down payment is 580 FICO. Borrowers can qualify for FHA Loans With 500 Credit Scores as long as they can get an approve/eligible per the automated underwriting system or meet FHA manual underwriting guidelines. Under HUD 4000.1 FHA Handbook, borrowers can qualify for FHA Loans under 580 FICO.

What FHA Lenders Work With A 500 Credit Score?

Not all mortgage companies will work with a 500 credit score. This holds true even though per HUD agency guidelines, borrowers who get an approve/eligible and/or meet the HUD manual underwriting guidelines with a 500 credit score are eligible for FHA financing. Gustan Cho Associates is one of the very few mortgage companies licensed in multiple states with no lender overlays on government and conventional loans. We have zero lender overlays on FHA loans. Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other mortgage companies due to lender overlays. A substantial number of our borrowers at Gustan Cho Associates are borrowers with credit scores down to 500 FICO on FHA, VA, and non-QM loans.

How To Get Approve/Eligible Per AUS On FHA Loans With 500 FICO Scores

To qualify for FHA Loans With 500 Credit Scores and up to 579 FICO

To qualify for FHA Loans With 500 Credit Scores and up to 579 FICO, HUD requires home buyers to put 10% down payment vs 3.5%. To qualify for FHA Loans With 500 Credit Scores, borrowers need to get an approve/eligible per automated underwriting system or meet manual underwriting guidelines. In order for Automated Underwriting System to render an automated approval on FHA loans With 500 Credit Scores, borrowers need to meet FHA Scorecard.

FHA Loan Automated Approval per AUS

To get an approve/eligible per AUS on FHA Loans With 500 Credit Scores, borrowers need to meet the minimum agency HUD guidelines stated in the HUD 4000.1 FHA Handbook. Below is a list of bullet points borrowers must meet to get the best chances of an approve/eligible per the automated underwriting system:

  • Timely payments in the past 12 months on all monthly payments reporting to credit bureaus
  • Outstanding collections and charged-off accounts do not have to be paid off but you cannot have credit disputes on non-medical collections, charged-off accounts, and other derogatory credit tradelines
  • Two-year waiting period after Chapter 7 Bankruptcy discharged date
  • Three-year waiting period after the recorded date of foreclosure, deed in lieu of foreclosure, short sale
  • Meet DTI Guidelines
  • Borrowers in an active Chapter 13 Bankruptcy payment plan are eligible to qualify for an FHA loan after making 12 timely payments
  • The Chapter 13 Bankruptcy does not need to be discharged
  • There is no waiting period after the Chapter 13 Bankruptcy discharged date to qualify for an FHA loan
  • If the Chapter 13 Bankruptcy has not been seasoned for 24 months, the file needs to be a manual underwrite
  • FHA manual underwriting guidelines apply
  • The maximum front-end debt to income ratio cap is 46.9% and the back-end is 56.9% DTI to get an automated approval per AUS

If borrowers meet all guidelines on the FHA Scorecard TOTAL, the borrower will render an approve/eligible on AUS. Gustan Cho Associates is a mortgage company licensed in multiple states with no overlays on government and conventional loans. We can qualify and close borrowers with 500 credit scores with automated approval.

Do Different Mortgage Lenders Have Different Requirements for The Same Loan Program?

Over 75% of our borrowers at Gustan Cho Associates are folks who either have gotten a last-minute mortgage denial or are stressing over their loan process with a current lender. Most lenders have overlays. What are overlays?  Lender overlays are additional credit score requirements that are above and beyond those of agency guidelines imposed by HUD. For example, borrowers can qualify with 500 credit scores with a 10% down payment under HUD Guidelines on FHA loans. However, a lender can say no to approving anyone with under 580 credit scores as part of their lender overlays. Mortgage lenders can have lending requirements that surpass the minimum lending guidelines of HUD on FHA loans.

Can I Get Approved For a Mortgage With a 500 FICO Credit Score?

Not all mortgage lenders have the same FHA lending requirements. However, you can get approved for an FHA loan with 500 credit scores if you meet the minimum agency HUD guidelines on FHA loans with a lender that has no lender overlays like Gustan Cho Associates. Most lenders will not take on any borrowers without a 620 credit score. This holds true even though HUD allows borrowers to have credit scores down to 500 FICO. Most banks require 640 credit scores. Yet other lenders will require 680 credit scores. Bottom line is that not all lenders have the same FHA Guidelines. They all need to meet minimum FHA Guidelines BUT can have higher credit score requirements on top of the minimum required by FHA. Gustan Cho Associates is one of the very few national lenders with no overlays on FHA Loans.

FHA and VA Guidelines During Chapter 13 Bankruptcy Payment Period

Homebuyers can qualify for FHA Loans during the Chapter 13 Bankruptcy Repayment plan. However, they need to be in an active Chapter 13 repayment one year with 12 timely monthly payments. Chapter 13 does not have to be discharged. It needs to be a manual underwrite. Trustee approval is required. Most trustees will approve a home loan. 

FHA and VA Guidelines After Chapter 13 Bankruptcy Discharge

There is no waiting period after the Chapter 13 Bankruptcy discharged date to qualify for FHA Loans. If the Chapter 13 discharge is seasoned for less than 24 months, it needs to be a manual underwrite. Timely payments during the Chapter 13 Bankruptcy payment period are very important. No late payments after the Chapter 13 Bankruptcy discharged date.

FHA And VA Loan Manual Underwriting Guidelines

Homebuyers can qualify for FHA Loans during the Chapter 13 Bankruptcy Repayment plan

Mortgage borrowers in current active Chapter 13 repayment and/or if the discharged date has not been seasoned for two years will not get an approve/eligible per automated underwriting system. The AUS will render a refer/eligible. Refer/eligible AUS Findings can be done with manual underwriting. Borrowers can qualify with 580 credit scores with manual underwriting. Again, any borrower with under 580 credit scores down to 500 can qualify with a 10% down payment. To qualify for FHA Loans with a 3.5% down payment, credit scores need to be 580 FICO or higher. FHA loans are very lenient in granting an AUS approval with recent late payments with a 20% down payment on a home purchase. That is not the case with VA loans. VA loans are very lenient with prior bad credit and low credit scores but want borrowers to have timely payments in the past 12 months.

Best Mortgage Lenders For 500 FICO Score Borrowers on FHA and VA Loans

Not all mortgage companies will work with borrowers with credit scores down to 500 FICO. Most FHA lenders have lender overlays on FHA loans. Just because a borrower meets all the minimum agency mortgage guidelines does not mean all lenders will approve them on an FHA loan. Lenders have the option to set their own higher lending requirements above and beyond the minimum agency HUD guidelines which are called lender overlays. Gustan Cho Associates has no lender overlays on government and conventional loans. Mortgage lenders can have lender overlays on just about anything and everything. Not all FHA lenders have the same lender overlays. Some lenders have stricter lender overlays than other lenders.

Mortgage Denied? Try Another Lender

Typical lender overlays by FHA lenders include lender overlays on the following:

  • Lender overlays on higher credit score requirements
  • Most lenders will require a 620 to 640 credit score even though HUD requires a 580 FICO for a 3.5% down payment FHA home purchase loan
  • FHA lenders may have overlays on requiring lower debt to income ratios than the maximum FHA debt to income ratio requirements
  • Mortgage companies may not allow outstanding collections and/or charged-off accounts even though HUD does not require collections/charged-off accounts to be paid to qualify for an FHA loan
  • Most FHA lenders will not approve borrowers on FHA loans with credit scores lower than 580 FICO
  • Many lenders do not do manual underwriting due to the risk factors involved in manual underwriting

Same Loan Programs Different Guidelines: Apply With Mortgage Broker With No Overlays

Gustan Cho Associates are mortgage brokers licensed in 48 states. We have lending partnerships with over 170 wholesale mortgage lenders. We have relationships with wholesale mortgage lenders with no lender overlays on VA loans. To qualify for FHA loans With 500 credit scores with a mortgage company with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or email us at [email protected] Text us for a faster response. 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 being able to do mortgage loans other lenders cannot do. We have a national reputation for not having lender overlays.