FHA Loans Versus VA Loans: Comparing Mortgage Options

In this article, we will be comparing FHA loans versus 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.

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VA Loans Is The Home Mortgage Loan Of Choice Versus FHA Loans

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 versus FHA loans. Some of the many benefits of VA loans versus FHA loans are 100% financing by lenders with no down payment required, no mortgage insurance premium, and no maximum loan limit. 

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

There are instances where borrowers need to opt to go with FHA loans versus 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 versus VA loans with lower credit scores, recent late payments, and 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.

Automated Underwriting System Algorithm Difficulty In Getting AUS Approval On FHA Loans Versus VA Loans

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.

Borrowers Of VA Loans With Lower Credit Scores And Recent Late Payments Have Better Chance Of Getting Approved With FHA Loans Versus VA Loans

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 versus 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.

Approval With FHA Loans Versus VA Loans If They Cannot Get An Automated Underwriting Approval And Cannot Meet VA Manual Underwriting Guidelines

VA and FHA loans both allow for manual underwriting. However, both VA and FHA manual underwriting guidelines require timely payments in the past 12 months. Therefore, 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%.

The Role Of The Veterans Administration (VA) And Housing And Urban Development (HUD)

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.

FHA Versus VA Loans: FHA Loan Requirements 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 Versus Down Payment Requirements On A Home Purchase

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% versus a 3.5% down payment.

FHA Loan Requirements For First-Time Homebuyers, Lower Credit Scores, Bad Credit, High Debt To Income Ratio

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.

The Role Of HUD On FHA Loans 

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 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 Credit 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 versus 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 Requirements To Meet All HUD Guidelines And Get 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 on 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 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.

Why Do Lenders Have Different Credit Score Requirements On FHA Loans

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 FHA And/Or VA Loans With A 500 Credit Score And Bad Credit If I Meet The Minimum FHA Guidelines?

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 Loan Requirements During Chapter 13 Bankruptcy Repayment Plan

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 Loan Requirements After Chapter 13 Bankruptcy Discharged Date

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 is 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.

Comparing FHA Loans Versus 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.

Understanding The Difference Between The Minimum HUD Guidelines Versus The Mortgage Company’s Lender Overlays On FHA Loans

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

Starting The FHA Loan Approval Process With An FHA Lender Licensed In Multiple States With No Lender Overlays On FHA 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, evenings, weekends, and holidays. Gustan Cho Associates has a national reputation of being able to do mortgage loans other lenders cannot do. We have a national reputation of not having lender overlays. 

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