FHA Loans With 500 FICO Credit Scores Mortgage Guidelines

This Article Is About FHA Loans With 500 FICO Credit Scores Mortgage Guidelines

Homebuyers can qualify for FHA Loans With 500 FICO Credit Scores.

  • Not too many lenders will offer FHA Loans With 500 FICO
  • HUD, the parent of FHA, allows borrowers with under 580 credit scores to qualify
  • To qualify for FHA Loans With 500 FICO, borrowers need to put a 10% down payment
  • However, most lenders will have lender overlays and not accept any borrowers with under 580 credit scores
  • This holds true even though HUD allows borrowers with under 580 FICO eligible for FHA loans with under 580 FICO and down to 500 credit scores with an AUS Approval 

In this article, we will discuss and cover FHA Loans With 500 FICO Credit Scores Mortgage Guidelines.

Why Do Certain Lenders Have Higher Credit Score Requirements

Not all lenders have the same credit score requirements on FHA loans. It is not illegal for a lender to take a pass on a borrower because they have higher lending standards than the minimum HUD Agency Guidelines:

  • Most lenders do have lender overlays
  • Lenders can have lender overlays on just about anything and everything
  • This is the exact reason why not all lenders have the same lending requirements on government and/or conventional loans
  • One lender may require a 640 credit score on FHA loans when lenders like Gustan Cho Associates will take borrowers with credit scores down to 500 FICO

Gustan Cho Associates is one of the very few national mortgage companies licensed in multiple states with no lender overlays on government and conventional loans.

Can I Qualify For An FHA Loans With 500 FICO?

FHA Loans With 500 FICO

HUD, the parent of FHA, allows borrowers with credit scores down to 500 FICO eligible to qualify for an FHA loan as long as they can get an approve/eligible per automated underwriting system (AUS).

  • HUD’s mission is to promote homeownership to hard-working Americans and make the dream of homeownership become a reality for American families
  • FHA loans are hands down has the most lenient mortgage guidelines than any other home loan program in the nation
  • It is much easier to get an AUS Approval on FHA loans than any other mortgage program for borrowers with less than perfect credit
  • Outstanding collections and charged-off accounts do not have to be paid to qualify for FHA loans
  • You can have prior bad credit, a prior bankruptcy and/or foreclosure, and a period of bad credit and qualify for FHA loans
  • This holds true as long as you have rebuilt and reestablished your credit

Timely payments in the past 12 months are key to getting an approve/eligible per automated underwriting system (AUS). 

Start Rebuilding And Reestablishing Your Credit After Prior Bad Credit

Lenders understand your credit can have hiccups when you lose your job and the income stream stops. However, most folks recover and reestablish themselves. Getting new positive credit is very important when you are rebuilding and re-establishing your credit to prepare to qualify for a home mortgage:

  • Let’s be honest, not everybody has perfect credit
  • Life happens, and certain events will impact your credit scores such as loss of job, divorce, or medical emergency
  • We all know it is very easy to wreck your credit score and next to impossible to get your scores back to where they were
  • Damage is done instantly, and re-establishing credit takes time
  • You may feel trapped into paying rent and making your landlord rich because of your credit score
  • That is where we save the day!
  • Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays
  • We are experts in originating and funding FHA Loans With 500 FICO Credit Scores
  • We are able to help clients obtain an FHA loan with credit scores all the way down to 500

In his blog, we will detail the qualifications for FHA mortgages with a credit scores between 500 and 579.

FHA Loans With 500 FICO Down Payment Mortgage Guidelines

The first thing you need to consider if your credit score is between 500 and 579 you are required to put down a minimum of 10% for an FHA loan.

  • Homebuyers with under 580 credit scores and down to a 500 FICO who do not have the 10% down payment will need to boost their credit to at least a 580 FICO to qualify for a 3.5% down payment home purchase FHA loan
  • The team at Gustan Cho Associates are experts in helping borrower boost their credit scores so they can qualify for a mortgage
  • We will work closely one on one with each borrower and advise them on what you need to do to boost credit scores to their maximum potential in the shortest period of time possible
  • Do not enroll in any credit repair programs or spend a lot of money in hiring a credit repair consultant
  • Credit repair during the mortgage process can do more damage than  good
  • There is no need to delete older derogatory credit tradelines
  • Derogatory credit tradelines that are older than two years old have little to no impact on your credit scores and does not impact your eligibility to qualify for a home mortgage
  • Credit disputes are not allowed during the mortgage process
  • Credit disputes will halt the mortgage process until the credit disputes are removed

All credit disputes on non-exempt non-medical collection accounts need to get removed before the mortgage process can proceed.  Medical outstanding collection accounts are exempt from credit disputes. You do not have to retract credit disputes on medical collections. Zero balance non-medical collection accounts are exempt from retraction of credit disputes. If the total balance of the outstanding collection accounts totals less than $1,000, you do not have to remove the credit disputes. Credit disputes from derogatory credit tradelines that have been seasoned for longer than 24 months are exempt from retraction.

What Credit Scores Is Needed For A 3.5% Down Payment Versus A 10% Down Payment Home Purchase FHA Loan

If your credit score is 580 or above, you are only required to put down 3.5%:

  • We help many clients who are close to 580 get their credit scores above that plateau but this is not possible in every situation
  • Every day we get phone calls asking if we offer the 10% down FHA loans for credit scores below 580 and down to a 500 FICO
  • The answer is, YES 
  • Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on FHA loans

In fact, we do many of them all the time! The team at Gustan Cho Associates are experts in helping homebuyers with credit scores down to a 500 FICO to qualify and get approved for an FHA loan.

HUD Agency Guidelines Versus Lender Overlays

Direct Lender With No Overlays On FHA Loans With 500 FICO

Gustan Cho Associates ONLY goes by the automated findings of the automated underwriting system. The only lending guidelines we go by are HUD Agency Guidelines with no lender overlays. 

  • NOTHING EXTRA
  • ZERO LENDER OVERLAYS
  • For a complete review of HUD requirements please see the HUD 4001.1 HANDBOOK
  • I recommend you give us a call directly versus reading this handbook
  • The handbook is full of hard to interpret mortgage lingo and not to mention over 1000 pages of guidelines

Please reach out to us directly at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at

gcho@gustancho.com.

Approve/Eligible Versus Manual Underwriting On FHA Loans With 500 FICO

One myth about sub 580 credit score FHA mortgages is that they require a manual underwrite.

  • That is simply not the case. Gustan Cho Associates have closed many approve/ eligible FHA Loans With 500 FICO
  • The AUS system will simply factor in payment history, reserves, and credit score, the determine if we need to manually underwrite the loan

See our AUS BLOG for more details.

Direct Lender With No Overlays On FHA Loans With 500 FICO

If you receive an approve/ eligible AUS report, Gustan Cho Associates will underwrite directly to those results.

  • Meaning the AUS will determine if your debt to income ratio and reserves are adequate
  • They will let us know what documentation will be needed to close

If you are required to downgrade to a manual underwrite we are experts in getting these closed. DO NOT panic, we do these all the time!

Differences Between AUS Approval Versus Manual Underwriting

The main difference if we need to manually underwrite the loan is proof of on-time rental or housing payments.

  • This can be accomplished with verification of rent if you’re paying a management company or 12 canceled checks showing payment to your landlord
  • There is more strict debt to income requirements when manually underwriting an FHA mortgage with credit scores below 580

See below:

DTI for credit scores of 500-579 may not exceed 31% / 43% –

  • meaning your housing payment may not be higher than 31% of your gross monthly income (including all taxes, insurances, and any homeowner’s association dues)
  • your total monthly debts must be below 43% of your gross monthly income

A large percentage of our borrowers are manual underwriting files. We are experts in manual underwriting.

Mortgage Rates With FHA Loans With 500 FICO Credit Scores

HUD Agency Guidelines Versus Lender Overlays

Many times, our borrowers are concerned about interest rates when combined with lower credit scores.

  • The good news with an FHA mortgage is you have the ability to complete an FHA streamline after you have made 6 payments on your current FHA loan
  • Please see our FHA STREAMLINE BLOG for details on that program
  • Once the mortgage is reporting on your credit report with at least six payments, you should see your credit scores skyrocket
  • At this time if rates are lower you made do an FHA streamline. having a mortgage with on-time payments reported to the credit bureaus is the best way to positively impact your credit profile

In the eyes of the credit bureaus, mortgage debt is considered good debt. It weighs in highly with their algorithms.

Starting FHA Loans With 500 FICO Mortgage Process With Gustan Cho Associates

How to start the mortgage process below 580:

Gather the following documentation:

  • Last 60 Days Bank Statements – to source 10% down payment
  • Last 30 Days Pay Stubs
  • Last Two Years W2’S
  • Last Two Years Tax Returns
  • Driver’s License or Government-Issued Photo ID

From there contact Gustan Cho Associates directly at 262-716-8151 or text us for a faster response. One of our experienced loan officers will answer any questions you have. We will assign you to a licensed loan officer in your state! We are available to answer your question 7 days a week, mornings or evenings. We pride ourselves on being up-to-date with all mortgage guidelines. We are a full-service mortgage company licensed in multiple states without any lender overlays to get in the way. We look forward to helping you and your family. Please read our reviews! They speak for themselves!

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