Can You Qualify For FHA Loans With Low Credit Scores?

One of the biggest benefits with FHA Loans is that mortgage loan borrowers can qualify for FHA Loans with low credit scores.  Besides the lenient requirements with regards to low credit score requirements, FHA Loans allow FHA mortgage loan borrowers who have open collections, prior bankruptcies, prior foreclosures, prior deed in lieu of foreclosures, and short sales to qualify for FHA Loans.  FHA Loans are the most popular mortgage loan program in the United States and makes first time home buyers and home buyers with bad credit or high debt to income ratios a chance to become homeowners with only a 3.5% down payment.

Minimum Credit Score Requirements For FHA Loans

A home buyer can qualify for FHA Loans with credit scores as low as 500 FICO credit scores.  However, to qualify for a 3.5% down payment FHA Loan, the home buyer needs a minimum credit score of 580 FICO.  Home buyers with credit scores below 580 FICO, a 10% down payment is required to qualify for a FHA insured mortgage loan.  Many FHA mortgage lenders do have FHA mortgage lender overlays on credit scores and set higher credit score standards than the minimum FHA credit score minimum requirements of 580 FICO.

What Are FHA Lender Overlays

FHA lender overlays are mortgage lending requirements and standards that is set by the individual mortgage lenders that surpasses the minimum FHA lending guidelines.  For example, the minimum credit scores to qualify for a 3.5% down payment home purchase loan set by the Federal Housing Administration is 580 FICO credit scores. However, a bank may ignore the minimum FHA lending guidelines of the 580 FICO minimum credit scores and have a credit score mortgage lender overlay that their institution require at 640 FICO credit scores.  It is not against the law for a lender to follow the minimum FHA lending guidelines and each mortgage company can have higher standards than the minimum FHA lending guidelines.

Prior Bad Credit

Mortgage loan borrowers can qualify for FHA Loans With Low Credit Scores, however, mortgage lenders will also review the mortgage loan borrower’s overall credit history. You can qualify for FHA Loans with bad credit as well as unpaid collection accounts, however, most mortgage lenders want to see re-established credit from the mortgage loan borrower for the past 12 months.  Credit scores and income is very important, but credit payment history is equally as important. Most mortgage lenders do realize that consumers can go through periods of bad credit due to unemployment, divorce, business failure, and medical issues but they want to see that the period of bad credit was due to extenuating circumstances and not financial irresponsibilities.  The overall credit history will be reviewed and the period of bad credit will be addressed and a detailed letter of explanation will be required.

FHA Guidelines On Collection Accounts

If you have unpaid collection accounts, do not pay them until you have consulted with a licensed mortgage loan originator.  Paying old collection accounts will drop your credit scores and re-activate the statute of limitations.  You can qualify for FHA Loans with unpaid collections, charge offs, judgments, tax liens, and other derogatory credit and FHA does not require to pay off the unpaid collection accounts in order to qualify for a FHA insured mortgage loan.  FHA does not count medical collections so all medical collections are not counted and exempted.  FHA does allow for a mortgage loan borrower to qualify for a FHA Loan with unpaid non-medical collection accounts but there are certain rules.  Non-medical collections with an aggregate balance of $2,000 or less is exempt.  For aggregate unpaid non-medical balances of greater than $2,000 in aggregate balance, 5% of the unpaid collection balance will be counted towards calculating the debt to income ratio of the mortgage loan borrower.  This can be a problem if the mortgage loan borrower has a high unpaid collection balance.  For example, unpaid collection balance of $10,000, 5% of the $10,000 or $500 will be used as a monthly expense and the mortgage loan underwriter will count it towards calculating the borrower’s debt to income ratios.  The good news is that if you have a written payment agreement with the collection agency, the mortgage underwriter will use the monthly written payment agreement with the collection agency in lieu of the 5% unpaid collection balance. So with the $10,000 unpaid collection balance, the 5% of the $10,000 or $500 will be exempted if a lower monthly payment agreement is agreed upon with the collection agency.  If the monthly written payment agreement has been agreed to $200, then the $200 will be used as the monthly payment instead of the $500.  There is no seasoning requirement with the payment history.  The day you have a written payment agreement with the collection agency is the date that the deal is effective.  Charge off accounts are ignored by FHA.

Judgments And Tax Liens

You can qualify for FHA Loans with judgments and tax liens without having to pay it off in full.  As long as you have a written payment agreement with the judgment credit and/or the Internal Revenue Service and have made at least three monthly payments, you should qualify for a FHA Loan.  Written payment agreement and three months of canceled checks needs to be provided.

Qualify Now For FHA Loan With No Lender Overlays

If you meet the minimum FHA Lending Guidelines but were told by a bank or mortgage lender that you do not qualify for a FHA Loan due to their mortgage lender overlays, contact Gustan Cho Associates at 262-716-8151 or email us at gcho@gustancho.com. We do not have any mortgage lender overlays and just go off DU FINDINGS . 

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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