This Article Is About HUD Credit Score Guidelines On FHA Home Loans

HUD, the parent of FHA, has the most lenient mortgage lending requirements on FHA loans than any other home mortgage program. FHA loans benefits borrowers with prior bad credit, lower credit scores, higher debt to income ratios, outstanding collections and/or charged off accounts, and other derogatory credit tradelines. You can get approved for FHA loans with unpaid collections/charged-off accounts and lower credit scores as long as you have been timely on all of your debt payments for the past 12 months. The minimum credit score required on FHA loans is 500 FICO. This holds true as long as you can get an approve/eligible per automated underwriting system (AUS). The key to getting an approve/eligible per automated underwriting system is to have timely payments in the past 12 months. Late payments in the past 12 months is frowned upon by mortgage underwriters and the automated underwriting system. Late payments after bankruptcy and/or foreclosure is frowned upon by lenders. The automated underwriting system does not like to see late payments after bankruptcy and/or foreclosure. However, one or two late payments after bankruptcy and/or foreclosure is not always a deal killer.

Gustan Cho Associates have helped countless borrowers qualify and close on FHA loans with lower credit scores and prior bad credit.

HUD Credit Score Guidelines On FHA Home Loans Versus Lender Overlays

There are minimum credit score requirements to qualify for FHA Loans:

• HUD Credit Score Guidelines requires a 580 credit score for  borrowers to qualify for a 3.5% down payment home purchase FHA loan
• HUD allows borrowers with credit scores down to 500 FICO to qualify for an FHA loans
• However, a 10% versus a 3.5% down payment is required for borrowers with under a 580 credit score
• FHA is part of the United States Department of Housing and Urban Development or HUD
• It is a federal organization that insures FHA Loans to lenders who are HUD Approved Lenders
• HUD does not originate FHA loans
• The role of HUD is to promote homeownership by insuring private lenders in the event their borrowers default and/or foreclose on FHA loans
• Lenders can offer a 3.5% down payment FHA loans for borrowers with at least a 580 credit score due to the government guarantee

How Does FHA Work

FHA will insure lenders who have originated and funded an FHA Loan against borrower default.

Here is how FHA works:

• FHA approved mortgage lender will qualify a borrower
• The borrower needs to meet FHA Guidelines such as minimum credit score requirements, debt to income ratio requirements, waiting period after bankruptcy and foreclosure, etc.

The lender does not have to just adhere to the minimum FHA Guidelines but can have additional tougher FHA Requirements:

• These additional lender requirements are called FHA Lender Overlays
• Overlays are NOT imposed by HUD
• Overlays are additional guidelines on top of agency guidelines by lenders

HUD will insure lenders if borrowers default on their FHA Loans.

What Are Lender Overlays

Reason lenders have overlays is because whenever an FHA Loan defaults, it goes against the lender:

• If too many FHA Loans default, lenders can be cut off from doing FHA Loans by HUD
• Although FHA guarantees defaulted FHA Loans, they do not like the fact that the loan has defaulted
• Defaults will be counted against the lender who their borrowers default on their FHA Loans
• Consistent default which could ultimately force HUD to cut lenders off from HUD Approval

Borrowers With Credit Scores Under 620 FICO

Although borrowers with credit scores under 620 FICO qualify for FHA Home Loans, most lenders will not take any borrowers unless their credit scores are at least 620 FICO or higher.

• Many Lenders will not take on any borrowers who do not have at least a 640 FICO credit score
• Again, if borrowers credit scores are under 640 FICO, make sure lender borrowers consult with does not have any overlays
• Look for lenders with no overlays on credit scores like Gustan Cho Associates
• Again, just because borrowers meet all FHA Guidelines may mean they qualify with all lenders
• The breakpoint with big changes in FHA Guidelines is the 620 Credit Score Mark

HUD Credit Score Guidelines does have an impact on borrowers who have credit scores under 620 FICO.

HUD Credit Score Guidelines With Credit Scores Under 620 FICO

Here are the differences in qualification requirements with HUD Credit Score Guidelines on borrowers with credit scores under 620 FICO:

• Debt To Income Ratio Requirements for borrowers with under 620 FICO credit scores is capped at 43%
• Debt To Income Ratio Requirements for borrowers with over 620 FICO credit scores is capped at 46.9% DTI front end and 56.9% DTI back end
• Outstanding collections and charge offs do not have to be paid
• Credit disputes are allowed on medical collection accounts and non-medical collection accounts with zero balance
• Credit disputes are not allowed on charge off accounts

Any non-medical collection accounts with over $1,000 in the total aggregate collection account balance.

HUD Credit Score Guidelines Versus Lender Overlays

Most lenders have lender overlays on FHA loans. All lenders need to have borrowers meet the minimum HUD Agency Guidelines. However, individual lenders can higher lending requirements on FHA loans that is above and beyond the minimum agency guidelines called lender overlays. Lenders having higher lending requirements is totally legal. Lenders are allowed to have lender overlays on just about anything. Below is a list of common lender overlays imposed by lenders on FHA Loans.

Here are typical lender overlays imposed by lenders on FHA loans:

• HUD does not require any credit tradelines by borrowers
• However, many lenders can require minimum of three credit tradelines that have been seasoned 12 to 24 months.
• Many lenders require verification of rent even though the automated underwriting system does not condition for it
• Verification of rent is providing 12 months canceled checks of the borrower’s rent payments
• However, many folks who are living with family rent free cannot provide verification of rent so they would not qualify with this particular lender
• Need to consult with another lender that does not have verification of rent overlays

Reserves:

• Many lenders will have overlays for borrowers with under 620 FICO credit scores
• They cannot get any gift funds for a down payment plus have three months of reserves as their overlays
• This is not a HUD Requirement on the Automated Approval but a lender overlay with particular lenders

Front End Debt DTI:

• Some lenders may require a front end 31% Debt to Income Ratio Overlay
• The front end debt to income ratio is the total housing payment (P.I.T.I.) divided by the borrower’s monthly gross income

Homebuyers who do meet the minimum HUD Agency Guidelines but are told they do not qualify for an FHA Loan because of the particular mortgage overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com.  Our loan officers specialize in all FHA Loan Programs that are best suited to you. We have no lender overlays. We go just off the automated underwriting system findings with zero lender overlays. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.