HUD Bad Credit Guidelines

HUD Bad Credit Guidelines On FHA Home Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

This BLOG On HUD Bad Credit Guidelines On FHA Loans Was PUBLISHED On January 14th, 2019

HUD Bad Credit Guidelines allow borrowers with bad credit to qualify for FHA Loans.

  • Minimum credit scores to qualify for FHA Loans with 3.5% down payment is 580
  • Borrowers with under 580 FICO and down to 500 credit scores can qualify for FHA Loans
  • However, 10% down payment is required on all FHA Loans under 580 FICO per HUD Bad Credit Guidelines
  • Outstanding collections and collections do not have to paid off
  • Late payments are allowed but need to be seasoned for over 12 months
  • Prior bankruptcy, foreclosure, deed in lieu, a short sale will not affect borrowers if they have met the required waiting period
  • One thing that is super important with qualifying for FHA Loans with bad credit and getting an AUS Approval is timely payments in the past 12 months

It is not likely borrowers will get an approve/eligible per automated underwriting system if borrowers had late payments in the past 12 months.

Benefits Of FHA Home Loans

FHA Loans is very popular among first time home buyers, borrowers with credit issues, and folks with higher debt to income ratios. 

  • HUD Bad Credit Guidelines makes FHA Loans easier to qualify than conforming loans
  • The automated underwriting system often favors FHA Loans with collections and bad credit than any other loan program
  • 3.5% down payment requirement is very reasonable for any home buyer to save in a reasonably short period of time
  • If buyers don’t have the down payment, HUD allows 100% gifted funds for buyers to use

HUD allows sellers to offer up to 6% sellers concessions to help with buyers closing costs. 

Down Payment And Closing Costs

With the exception of VA and USDA Loans, all loan programs require down payment.

  • All home purchase and refinance transactions come with closing costs
  • FHA allows borrowers to get up to 6% in sellers concessions for home buyers closing costs
  • Closing costs cannot be used for the down payment
  • It can only be used for closing costs
  • Any overages in sellers concessions need to go back to sellers

HUD Guideline On Gift Funds

HUD Guidelines allow home buyers to get their down payment and/or closing costs gifted. Family members and/or friends gifting homebuyers down payment cannot expect repayment. The gift is solely a gift and not a loan.

Gift funds can be gifted by the following:

  • Family Members and close friends of borrowers
  • Employers
  • Labor Union
  • Charitable Non-Profit Agency and/or Organization
  • City, county, state, federal government organization offering down payment assistance to first time home buyers, buyers with low and/or moderate-income, veterans, and others in need

FHA Eligibility Guidelines And Requirements

Both borrowers and property need to meet FHA requirements.

  • Owner occupant properties one to four units zoned residential are eligible
  • The borrower needs to live in one of the units on two to four-unit multi-family units
  • Maximum DTI to get an approve/eligible per AUS is 46.9% front end and 56.9% back end
  • HUD Bad Credit Guidelines requires borrowers to get an approve/eligible per automated underwriting system
  • For automated underwriting system to render approve/eligible, borrowers normally need timely payments in the past 12 months
  • Refer/eligible AUS FINDINGS normally require 24 months timely payments to qualify for manual underwriting

Automated Underwriting System renders a decision in a matter of seconds after analyzing borrowers’ credit payment history, credit scores, tradelines, income, liabilities, assets, public records, reserves, and loan to value. Recent timely payments in the past 12 to 24 months are carefully looked at.

FHA Guidelines On Bankruptcy And Housing Event

Borrowers can qualify for FHA Loans after bankruptcy and/or housing event after meeting mandatory wait periods:

HUD guidelines for bankruptcy are as follows according to HUD 4000.1 handbook:

  • 2 year waiting period after Chapter 7 Bankruptcy discharged date
  • Borrowers can qualify for FHA Loans one year into their Chapter 13 Repayment plan with Trustee Approval
  • Chapter 13 does not have to be discharged
  • Needs to be manual underwriting
  • No waiting period after Chapter 13 Bankruptcy discharged date
  • If the discharged date is seasoned for less than 2 years, it needs to be manual underwriting
  • No late payments during and after Chapter 13 Bankruptcy

HUD Guidelines After Housing Event

There is a mandatory three-year waiting period after foreclosure, deed in lieu of foreclosure, short sale.

  • Waiting period start date is the recorded date of the foreclosure and/or deed in lieu
  • On short sales, it is the short sale date reflected on the closing statement

HUD Bad Credit Guidelines On Collections, Charge Offs, Judgments And Tax Liens

Borrowers can qualify for FHA Loans without paying outstanding collections and charged-off accounts. FHA classifies collections in two categories. Non-Medical and Medical Collections. 5% of the outstanding balance on non-medical collections that are greater than $2,000 is used as a monthly hypothetical debt of borrowers. Borrowers do not have to pay for it. However, underwriters need to use it as hypothetical debt when calculating borrowers DTI. Charged off accounts do not matter and are exempt from the 5% rule.

  • Medical collections are exempt obligations that are not considered debt by HUD on FHA Loans
  • Delinquent Federal Debt delinquent disqualifies borrowers from government mortgages
  • Borrowers with tax liens and/or other government debt may result in a borrower being ineligible for FHA Loans:
    • Once the federal debt is reflected by the public record, credit report, CAIVRS, or another equivalent system, the status of the delinquency must be verified

HUD Mortgage Guidelines With NON-Traditional Credit Tradelines

There are times when borrowers do not have any credit scores due to no traditional credit reporting on their credit reports. FHA allows borrowers with no credit scores to qualify with non-traditional credit. Non-Traditional credit is creditors such as utility companies, cellular phone companies, and other creditors that do not report on consumer credit bureaus. Other examples of non-traditional credit include the following:

  • rental housing payments to the landlord
  • telephone service
  • gas, electricity, water, and cable providers
  • internet service
  • education tuition
  • insurance agencies

A minimum of three credit references with 12 months is required when using non-traditional credit. Proof of payment is required. Proof of payment allowed is canceled checks and/or bank statements.

Qualifying For Bad Credit Home Loans With Direct Lender With No Overlays

Borrowers with bad credit who need a direct lender with no overlays on government and conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at 

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