FHA Mortgage Guidelines: Guide To FHA Loan Approval

FHA Loans are the most popular mortgage loan program in the United States. The United States Department of Housing and Urban Development, HUD, is the parent of FHA. Under the new HUD FHA Handbook 4000,1, which is the most recent FHA Mortgage Guidelines, FHA will permit borrowers with credit scores north of 620 FICO a maximum of 46.9% DTI front end debt to income ratios, which is called the housing ratios, and the maximum debt to income ratio is 56.9% DTI on the back end debt to income ratio.

FHA Loans For First-Time Homebuyers With Bad Credit

First-time home buyers, as well as home buyers with prior bad credit, a prior bankruptcy, a prior foreclosure, a prior deed in lieu, and a prior short sale, can qualify for FHA loans. There are mandatory waiting periods after bankruptcy and foreclosure to qualify for FHA Loans.

FHA Loans After Bankruptcy And Foreclosure

There is a minimum waiting period to qualify for FHA Loans per HUD Loan Guidelines, after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. For traditional FHA loans, there is a mandatory 2 year waiting period after the discharge date of Chapter 7 bankruptcy discharge. There is a mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure, and short sale.

Waiting Period After Foreclosure Start Date

The waiting period clock starts from the recorded date of the foreclosure and/or date of the deed in lieu of foreclosure that is reflected on public records. Or the date of the sheriff’s sale. The waiting period start date is not the date where the keys were surrendered to the lender. The three-year waiting period after a short sale starts on the date of the short sale which is reflected on the HUD-1 Settlement Statement date. Gustan Cho Associates offers non-QM loans where homebuyers can qualify for a mortgage one day out of bankruptcy and/or foreclosure with a 30% down payment.

FHA Loans With Collection Accounts

You can qualify for an FHA Loan with prior bad credit. You can qualify for an FHA Loan with unpaid collection accounts, charge-offs, and even judgments. HUD, the parent of FHA,  does not require you to pay off your old collection accounts in order for you to get loan approval and close on your mortgage loan. There are many lenders that have lender overlays. Lender overlays are the lender’s own guidelines that are above and beyond the minimum lending guidelines of FHA. Most lenders do require unpaid collections to be paid off prior to closing. The reason most lenders have overlays on collections and/or charged-off accounts is that they are afraid of collection agencies may pursue judicial proceedings.

FHA Lenders With No Overlays

Gustan Cho Associates is affiliated with wholesale partner lenders with no overlays. We only go off the minimum HUD Agency Guidelines. All we go off are the findings of the automated underwriting system (AUS) and have zero lender overlays. If HUD says no collections need to be paid off,  no collection accounts need to be paid off.

HUD Mortgage Guidelines On Medical Collections

FHA does not count unpaid medical collection accounts. Medical collections and charged-off accounts (whether medical and/or non-medical) are exempt from taking 5% of the outstanding collection balance and using it as a hypothetical debt when underwriters calculate debt to income ratios. You can have a high balance of unpaid medical collection accounts and the 5% hypothetical debt is exempt. With non-medical collection accounts, you do not have to pay off any unpaid collection balance. However, if the total unpaid collection balance is greater than $2,000, HUD requires underwriters to take will 5% of the unpaid collection balance as a hypothetical monthly debt obligation.

Outstanding Collections Affects Debt To Income Ratio 

The hypothetical 5% will count towards calculating the borrower’s debt to income ratios. This holds true even though you do not pay anything. This can become a problem if your unpaid collection balance is of a larger amount. For example, if you have a $20,000 unpaid total collection balance, 5% of the $20,000, or $1,000, will be counted as a monthly debt obligation. This hypothetical debt will be used to calculate your debt to income ratio. This can be a deal killer if you already have higher debt-to-income ratios.

Written Payment Agreement With Creditors on Collections

HUD does allow for you to enter into a written payment agreement with the creditor. The figure you and the creditor mutually agree, that figure will be used by the mortgage underwriter as your monthly debt. For example, on the $20,000 unpaid credit balance, if you and the creditor agreed on a monthly payment of $200.00 per month, then the $200.00 per month will be used as the monthly debt payment on that collection account versus the 5% of the $20,000 which is $1,000.00. There is no payment seasoning requirement with this rule.

FHA Loans With High Debt To Income Ratio

The maximum debt to income ratio on conventional loans is 50% to get an approve/eligible per automated underwriting system (AUS). There is no front-end debt-to-income ratios on conventional loans. Borrowers with debt to income ratios higher than 50% DTI can turn to FHA loans to qualify. HUD is much more generous with debt to income ratios as well as approving borrowers with prior bad credit. HUD caps their back-end debt to income ratios at 56.9% to get an approve/eligible per AUS. The maximum front-end debt to income ratio cap is at 46.9% DTI. FHA loans are the best and most popular loans for first-time home buyers, homebuyers with bad credit and low credit scores, self-employed buyers, and homebuyers who have high debt to income ratios. Gustan Cho Associates has no lender overlays on FHA loans.

Non-Occupant Co-Borrowers

If the main borrower has little or no income documentation to qualify for a 3.5% down payment FHA loan, HUD allows the borrower to add a non-occupant co-borrower for income qualification purposes. The non-occupant co-borrower needs to be related to the main borrower by marriage, blood, or law. Special exceptions may be made if the non-occupant co-borrower has been close friends with the main borrower for at least 5 or more years. HUD allows non-occupant co-borrowers who ARE NOT related to the main borrower by law, blood, and/or marriage. However, non-family non-occupant co-borrowers need to put 25% versus a 3.5% down payment. HUD allows more than one non-occupant co-borrower to be added to the main borrower.

Gift funds And Sellers Concessions For Down Payment and Closing Costs

HUD allows the home buyer to get 100% gift funds to be used for the down payment and/or closing costs. Gift funds need to come from a relative of the home buyer. A gift letter needs to be signed by the donor stating that the funds are only a gift and are not a loan and do not have to be paid back to the donor. HUD allows up to 6% seller concessions towards home buyer closing costs.  However, the closing costs cannot be wasted so make sure you do not get excess sellers concessions where you cannot apply it to your closing cost.  In the event, that there is an overage in seller concessions, it needs to go back to the home seller.

Benefits of FHA Loans

FHA Loans are residential mortgage loans that are originated, processed, underwritten, and funded by banks and private mortgage companies that are FHA approved. The Federal Housing Administration, FHA, is a subsidiary of the United States Department of Housing and Urban Development, known by HUD by many. The Federal Housing Administration does not originate nor fund mortgage loans. In this article, we will discuss and cover What Is FHA Loan And Its Benefits And Mortgage Guidelines.

The Role And Function Of FHA And How It Works

The function of the Federal Housing Administration is to insure owner-occupant residential loans, FHA Loans, to HUD-approved lenders such as banks and mortgage companies against borrowers’ default. In order for the Federal Housing Administration to insure FHA Loans to HUD-approved lenders, lenders need to follow HUD mortgage lending guidelines. In the event, that the mortgage lender made a mistake and did not follow HUD lending guidelines on a particular FHA loan and that loan went into default, the Federal Housing Administration will not insure the HUD-approved lender against that borrower’s default. That is why mortgage lenders are extremely anal when it comes to underwriting FHA loans and required complete documentation.

FHA Mortgage Lending Guidelines

The basics of FHA mortgage lending guidelines are as follows:

• A minimum credit score of 580 for a 3.5% down payment home purchase
• Borrowers with credit scores of at least 620 or higher, then the maximum back end debt to income ratio caps are capped at 56.9% back end and 46.9% front end for AUS Approval
• Lower credit score borrowers can get an approve/eligible per AUS with 46.9% front-end and 56.9% back-end with compensating factors
• Without compensating factors, borrowers with credit scores under 620, the maximum debt to income ratio may get a cap at 43% to get an approve/eligible per automated underwriting system approval (AUS)

These debt-to-income ratios are the requirements to get an approve/eligible per DU FINDINGS or LP FINDINGS per Automated Underwriting System.

FHA Loan After Bankruptcy And A Housing Event

Minimum 2 years out of Chapter 7 Bankruptcy discharged date:

• The two-year waiting period starts from the discharged date of the bankruptcy and not the filing date
• Minimum 3 years waiting period after a short sale
• The short sale waiting period starts from the date of the short sale which is reflected in the HUD Settlement Statement
• Minimum 3 years after foreclosure and/or deed in lieu of foreclosure
• The waiting period after foreclosure and/or deed in lieu of foreclosure starts from the recorded date of the foreclosure and/or deed in lieu of foreclosure and/or date of the sheriff’s sale

Not the date the keys were turned in to the lender or when the property was surrendered.

FHA Loan Down Payment Requirements

Down payment requirements on FHA Loan Programs:

• 3.5% down payment with at least a 580 credit score
• For borrowers with credit scores under 580, a 10% down payment is required

Can I Qualify For An FHA Loan With Unpaid Collections and Charged-Off Accounts?

Many borrowers are often confused about what is FHA loan and the credit requirements:

• Medical collection accounts and charge offs do not matter
• Does not need to be paid off

Non-medical collection accounts:

• Borrowers with under $2,000 in unpaid collection accounts TOTAL, then it does not matter
• If total collection accounts are over $2,000, then 5% of the unpaid collection account balance will be taken and calculated towards debt to income ratios
• Treated as a monthly expense even though borrowers do not have to pay for it
• Borrowers a substantial large unpaid collection account balance can make a written payment agreement with the creditor

That written agreed payment agreement will be used as a monthly expense to calculate debt to income ratios instead of the 5% of the unpaid collection account balance.

Credit Disputes During The Mortgage Process

Cannot have credit disputes during the mortgage process on non-medical collection accounts with balances greater than $1,000 ( aggregate ) and charge offs:

• Can qualify for an FHA Loan with charged-off accounts
• However, cannot have credit disputes on charge off accounts
• Zero balance derogatory tradelines are permitted
• Credit disputes on medical collection accounts are permitted as well

Can I Go To Any Lender For A FHA Loan?

The above FHA Loan Requirements are the minimum agency mortgage guidelines imposed by the Federal Housing Administration in order for home loans to be insurable by HUD. Lenders can impose tougher Requirements than the minimum required by HUD. The tougher requirements are called FHA mortgage lender overlays.  For example, FHA’s minimum credit score to qualify for a 3.5% down payment home purchase is 580. However, a particular lender can have a minimum 640 credit score requirement to qualify with a 3.5% down payment with their lending institution. This is called an FHA lender overlay this lender has. Overlays are an additional lending requirement imposed by individual lenders that is above the minimum FHA requirements.

Typical Common Lender Overlays Imposed By Lenders

There are other types of overlays lenders may require such as the following:

• lower debt to income ratios
• verification of rent
• minimum credit tradelines
• reserves
• outstanding collections and charged-off accounts to be paid off
• other additional FHA requirements that are above and beyond those set by the Federal Housing Administration.

Homebuyers looking for a lender with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Borrowers can also email us at gcho@gustancho.com. We are available to answer questions and take mortgage loan applications 7 days a week including evenings, weekends, and holidays.

What Are FHA Loans and How Does It Work?

In this article, we will cover FHA mortgage requirements in comparison to conventional loans. In general, conventional loans benefit borrowers with higher credit scores, low debt to income ratio, established credit history, and good credit. FHA loans are much more flexible and easier for first-time homebuyers with lower credit scores and/or borrowers with credit/income issues.  FHA loans are most popular for homebuyers with low credit scores, bad credit, high debt to income ratio, and little to no credit tradelines.

FHA Versus Conventional Loan Credit Score Requirements

HUD guidelines allow borrowers to qualify for FHA loans with bad credit and 500 FICO. The minimum credit score to qualify for conventional loans is 620 FICO. FHA loans are one of three government-backed mortgage loan programs and do not allow for second homes and investment property financing. Conventional loans allow financing on second homes and investment properties. FHA loans have a shorter waiting period after bankruptcy and foreclosure. In this article, we will compare the two mortgage loan programs side by side where you will know which mortgage is best for your home purchase and/or home refinance.

Updated FHA Mortgage Guidelines On HUD 4000.1 FHA Handbook

There have been several changes to FHA Mortgage Requirements since the launch of the HUD 4000.1 FHA Handbook released last September 14, 2015. FHA loans are the most popular home mortgage program for first-time homebuyers, borrowers with credit scores down to 500 FICO, borrowers with high debt to income ratios, borrowers with outstanding collections and/or charged-off accounts, and homebuyers with less than perfect credit profiles. It is easier to get an approve/eligible per automated underwriting system on FHA loans than any other loan program. Lenders aggressively originate and fund FHA loans than any other loan program due to the government guarantee.

Updated FHA Mortgage Guidelines On Deferred Student Loans

Due to the government guarantee by HUD, lenders can offer FHA loans to homebuyers at 3.5% down payment, less than perfect credit, at competitive mortgage rates. Homebuyers can qualify for FHA loans with credit scores down to 500 FICO.  Borrowers with large outstanding loans can now qualify for FHA loans with income-based repayment (IBR). Homebuyers with large outstanding student loans in deferment can take 0.50% of the outstanding student loan amount and use it as a hypothetical debt just like conventional loans.

FHA Loans For Homebuyers With Lower Credit Scores And Bad Credit

HUD, the parent of FHA, does not originate or fund FHA loans. HUD is in charge of FHA loans and acts as a government mortgage insurance agency. HUD insures FHA loans private mortgage companies originate and fund in the event borrowers default on their FHA loans. FHA loans are the most popular mortgage loan program today for home buyers. Besides being very popular with first-time homebuyers,

FHA Mortgage Guidelines On Down Payment Requirements Versus Credit Scores

FHA loans benefit countless other types of borrowers. With only a 3.5% down payment with a 580 credit score requirement, lenders are aggressively seeking borrowers on FHA loans at competitive rates due to the government guarantee. Most borrowers can close on a home purchase FHA loan in 30 days or less. There is no red tape and the mortgage process is streamlined and fast on FHA loans.

FHA Loans 500 FICO Down Payment Requirements 

HUD allows borrowers with credit scores down to 500 FICO to qualify for an FHA loan. However, if the borrower has credit scores between 500 to 579 FICO, a 10% down payment is required versus a 3.5% down payment. FHA loans are the most popular program for borrowers with bad credit and lower credit scores.

Why FHA Loans Are So Popular

http://www.youtube.com/watch?v=Y-xi_wJ8vpA&ab_channel=Gustan Cho Associates-MortgageBankers

FHA loans are the best loan program for first-time homebuyers, borrowers with less than perfect credit, those with credit scores down to 500 FICO. HUD, the parent of FHA, has set lenient guidelines with regards to the following:

• credit scores
• credit history
• collection accounts
• charge off accounts
• gift funds for the down payment
• the waiting period after bankruptcy and foreclosure
• non-occupant co-borrower requirements
• debt to income ratio requirements

Mortgage Rates On FHA Loans

Mortgage rates on FHA loans are one of the lowest out of all mortgage loan programs. This is since FHA Loans are insured by the Federal Housing Administration against the borrower defaulting on their FHA loans. The Federal Housing Administration, FHA, is not a mortgage lender. FHA Loans are originated and funded by banks and mortgage companies who are FHA approved and as long as they follow FHA guidelines on all of the FHA Loans they originate and fund.

FHA Mortgage Guidelines On Credit Scores

The FHA Loan will be insured by the United States Department of Housing and Urban Development, which is commonly known as HUD, which is the parent of the Federal Housing Administration or FHA. Homebuyers only need a 580 credit score to qualify for a 3.5% down payment FHA home purchase loan. Homebuyers with credit scores between 500 and 579 can also qualify for FHA Loans.

FHA Loan Requirements On 500 Credit Scores

Borrowers with 500 credit scores can qualify for an FHA loan. A 10% down payment on a home purchase is required for FHA Borrowers with credit scores of under 580 credit scores. Debt to income ratio requirements on FHA Loans is 56.9% DTI for mortgage borrowers who have credit scores of 620 credit scores and higher. Debt to income ratio requirements for the borrower with under 620 credit scores is capped at 43% DTI to get an approve/eligible per AUS.

FHA Mortgage Guidelines On Bad Credit

Many hard-working Americans have run into credit issues at one time or another due to the following:

• unemployment
• loss of employment
• divorce
• medical issues
• or other extenuating circumstances where they had a disruption of their household income were affected their credit
• Some folks could not pay their bills for an extended period of time and their creditors turned their accounts to collection accounts status or charged off the account
• HUD realizes that consumers could run into periods of bad credit

HUD does NOT require collection accounts to be paid off or charge off accounts to be paid off in order for borrowers to qualify for FHA Loans.

FHA Mortgage Requirements On Outstanding Collections And Charged Off Accounts

FHA classifies collection accounts into three different categories:

1. Non-Medical Collections Accounts
2. Medical Collection Accounts
3. Charge Off Accounts

FHA Loan Requirements On Non-Medical Versus Medical Collections

With non-medical collection accounts, FHA mortgage borrowers do not have to pay off non-medical collection accounts in order to qualify for an FHA-insured mortgage loan. However, if the borrower has a total sum of over $2,000 from all of their creditors that are considered non-medical collection accounts. Then 5% of the outstanding non-medical collection account balance is taken into consideration. This is used to calculate the borrower’s debt-to-income ratios even though the borrower does not have t.o pay anything every month.

FHA Loans Mortgage Case Scenario

For example, let’s take a case scenario:

• if the FHA mortgage loan borrower has five non-medical collection accounts
• the total outstanding unpaid balance of the collection accounts is $10,000
• than 5% of the $10,000 will be used as part of the borrower’s monthly debt payments
• This is a hypothetical payment even though the borrower does not have to pay a penny

This hypothetical monthly payment is used to calculate the borrower’s debt to income ratios.

FHA Mortgage Guidelines On Outstanding Collections And How It Affects DTI

If the outstanding non-medical collection balance is large and the 5% calculation will disqualify the borrower, borrowers can enter into a written payment agreement with the collection agency and/or creditor:

• Whatever is agreed upon in the written payment agreement will be used as a monthly debt payment in lieu of the 5% of the outstanding non-medical collection account balance
• There are no seasoning requirements on written payment agreements
• The day the written payment agreement is executed with the creditor is the day it is effective and in force
• If the borrower were to default on their written payment agreement with the collection agency and/or creditor after the closing of their FHA Loan, that would not matter or affect his FHA Loan
• This is due to the lender nor FHA having no control over the borrower after the FHA Loan has closed.

Medical collections and charge-off accounts are exempt from debt to income ratio calculations no matter what the outstanding balance is.

FHA Mortgage Requirements On Credit Disputes

There are strict FHA Mortgage Requirements on credit disputes. Borrowers cannot have any credit disputes on charge-off accounts or any non-medical collection accounts with total aggregate outstanding balances that are greater than $1,000.

For example, let’s take a case scenario:

• have six non-medical collection accounts
• each of $200 unpaid outstanding collection balances
• $200 dollars times six collection accounts total $1,200
• So the aggregate balance is over $1,000
• Those credit disputes need to be removed from the credit report in order for borrowers to qualify for an FHA Loan

FHA Loans On Negative Impact When Retracting Credit Disputes

One thing that will affect borrowers in retracting credit disputes is that it will lower credit scores when they retract credit disputes:

• Credit disputes on non-medical collection accounts with zero balances are exempt
• Borrowers can have credit disputes on non-medical collection accounts that are zero balance
• Cannot have any credit disputes on charge off accounts, late payments, or other derogatory credit items
• Credit disputes on medical collection accounts are exempt

Borrowers are allowed to have credit disputes on medical collection accounts no matter how much the outstanding unpaid medical collection balance is.

FHA Mortgage Requirements On Deferred Student Loans

As of September 14, 2015, all student loans that are deferred do not matter and are no longer exempt from debt to income ratio calculations on FHA Loans. Before September 14, 2015, all deferred student loans that have been deferred for longer than 12 months were exempt from debt to income ratio calculations on FHA Loans. But that is no longer the case with the New HUD 4000.1 FHA Handbook.

FHA Deferred Student Loan Guidelines

Borrowers with deferred student loans need to get a set monthly payment amount in writing from the student loan provider when the student loan is out of deferment. If the borrower cannot provide a monthly payment statement once the student loan is out of deferment, then the lender will use 0.5% of the outstanding student loan balance as a monthly expense in calculating the borrower’s debt to income ratios. HUD now accepts income-based repayment.

FHA Loans On Amortized Monthly Payment Over Extended Term On Student Loans

Lenders will take 0.50% of the outstanding balance of student loans as part of borrowers’ debt to income ratio calculations.

However, borrowers with larger student loan balances need to contact the student loan provider and request the following:

• Tell student loan customer service rep that you are applying for a mortgage
• The lender asked to get a fully monthly amortized monthly payment over an extended term (normally 25 years)
• This needs to be in writing
• This figure normally turns out to be under 050% of the student loan balance

Borrowers can use the fully amortized monthly payment if it is lower than 0.5% of the loan amount versus 0.50% of the student loan balance if they use this technique.

Comparing Conventional Loans Versus FHA Loans

Conventional loans are not backed by any government agency like FHA loans are backed by HUD. Conventional loans are the most popular loan program in the country. However, conventional loans are for higher credit profile borrowers. The benefits of conventional versus FHA loans are it has a higher loan limit. 2022 conforming loan limits are capped at $647,200. The newly released 2022 FHA loan limits are capped at $420,680.

2022 High-Balance FHA and Conforming Loan Limits On Single-Family Homes

High-balance FHA and conforming loan limits for 2022 are capped at $970,800 in high-cost areas on single-family homes. Homebuyers needing a larger loan amount than FHA’s $422,680 can get qualified for conventional loans versus FHA loans. FHA loans are for owner-occupant primary homes only. You cannot qualify for a second home or investment property with an FHA loan. Fannie Mae and Freddie Mac allow second homes and investment property financing on conforming loans. The minimum credit score requirement on conforming loans is 620 versus FHA’s 500 FICO requirements. There are no front-end DTI requirements on conventional loans but the back-end DTI is capped between 45% to 50% maximum back-end DTI. Fannie Mae and Freddie Mac will allow up to a 50% DTI for borrowers with 680 FICO or higher.

Conventional Loan Requirements On Student Loans

Borrowers with larger outstanding student loan balances can go either with FHA or conventional loans. Fannie Mae and Freddie Mac allow Income-Based Repayment (IBR) on conventional loans and so does HUD on FHA loans. Gustan Cho Associates is very creative and we can see if we can structure the loan to make it convenient so the larger student loan balance does not disqualify borrowers from qualifying. Conventional loans have higher loan limits than FHA loans.

FHA Lenders With No Lender Overlays

If you are a home buyer and need to get qualified for an FHA-insured mortgage loan and need a lender with no lender overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week to take phone calls or answer emails and answer any questions you may have on FHA Loans.