FHA Loans With Low Credit Scores And Bad Credit

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FHA Loans With Low Credit Scores And Bad Credit

This BLOG On FHA Loans With Low Credit Scores And Bad Credit Was UPDATED On July 15th, 2018

One of the biggest benefits with FHA Loans is borrowers can qualify for FHA Loans with low credit scores.

  • Besides the lenient requirements with regards to low credit score requirements, FHA Loans allow borrowers with the following qualify:
    • open collections
    • charge offs
    • late payments
    • prior bankruptcies
    • prior foreclosures
    • prior deed in lieu of foreclosures
    • short sales to qualify for FHA Loans
  • FHA Loans are the most popular mortgage loan program in the United States
  • 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 Requirements For FHA Loans With Low Credit Scores

A home buyer can qualify for FHA Loans with credit scores as low as 500 credit scores.

  • However, to qualify for a 3.5% down payment FHA Loan, buyer needs a minimum credit score of 580
  • Home buyers with credit scores below 580, a 10% down payment is required
  • Many lenders do have overlays on credit scores
  • They set higher credit score standards than the minimum FHA credit score minimum requirements of 580

What Are FHA Lender Overlays

Borrowers can qualify for FHA Loans With Low Credit Scores with lenders with no overlays. FHA lender overlays are mortgage lending requirements and standards that is set by the individual lenders that surpasses the minimum HUD 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 credit scores
  • However, a bank may ignore the minimum FHA lending guidelines of the 580 minimum credit scores
  • The bank may have a credit score overlay that their institution require at 640 credit scores
  • It is not against the law for a lender to have higher lending requirements than those set by HUD
  • All lenders need to follow the minimum FHA lending guidelines
  • However, each mortgage company can have higher standards than the minimum FHA lending guidelines which are called overlays

Prior Bad Credit

Borrowers can qualify for FHA Loans With Low Credit Scores. However, mortgage lenders will also review borrower’s overall credit history

  • Borrowers can qualify for FHA Loans with bad credit as well as unpaid collection accounts
  • However, most lenders want to see re-established credit from borrower for the past 12 months
  • Credit scores and income is very important
  • But credit payment history is equally as important
  • Most lenders do realize that consumers can go through periods of bad credit due to the following:
    • unemployment
    • divorce
    • business failure
    • medical issues
  • But they want to see that the period of bad credit was due to extenuating circumstances and not due to being financially irresponsible
  • The overall credit history will be reviewed
  • The period of bad credit will be addressed and a detailed letter of explanation will be required

FHA Guidelines On Collection Accounts

Borrowers with unpaid collection accounts, do not pay them until they have consulted with a licensed mortgage loan originator.

  • Paying old collection accounts will drop credit scores and re-activate the statute of limitations
  • Borrowers can qualify for FHA Loans with the following:
    • unpaid collections
    • charge offs
    • judgments
    • tax liens
    • other derogatory credit

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
  • All medical collections are not counted and exempt from debt to income calculations
  • FHA does allow borrowers 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 from DTI calculations
  • For aggregate unpaid non-medical balances of greater than $2,000 in aggregate balance the following guidelines applies:
    • 5% of the unpaid collection balance will be counted towards calculating the debt to income ratio of borrowers
  • This can be a problem if 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
    • Mortgage loan underwriter will count it towards calculating the borrower’s debt to income ratios
  • The good news is that if borrower has 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 exempt 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 borrower has a written payment agreement with the collection agency is the date that the deal is effective
  • Charge off accounts are ignored by FHA with debt to income ratio calculations

Judgments And Tax Liens

Borrowers can qualify for FHA Loans with judgments and tax liens without having to pay it off in full.

  • As long as borrowers has a written payment agreement with the judgment creditor and/or the Internal Revenue Service and have made at least three monthly payments, they 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

Borrowers who meet the minimum FHA Lending Guidelines but were told by a bank or mortgage lender they do not qualify for a FHA Loan due to their overlays, please contact us at 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 . 

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