HUD Derogatory Credit Guidelines On FHA Home Loans

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

HUD, the parent of FHA, is the federal agency in charge of creating and launching HUD Agency Guidelines on FHA loans. HUD has the most lenient mortgage agency guidelines than any other home loan program. Borrowers with lower credit scores and prior bad credit can qualify for an FHA loan. You can have outstanding collections and/or charged-off accounts and qualify for an FHA loan without having to pay it off. You can have prior bad credit, late payments, and other derogatory credit tradelines and qualify for an FHA loan. However, the key to getting an approve/eligible per automated underwriting system is to have been timely in the past 12 months. In this article, we will discuss and cover qualifying for an FHA loan with derogatory credit. We will cover HUD Agency Guidelines versus other loan programs.

Qualifying For An FHA Loan With Outstanding Judgments And Tax Liens

How to qualify for an FHA loan with arrears and tax liens

Borrowers can qualify for an FHA loan with outstanding judgments as long as they have a written payment agreement with the judgment creditor. The borrower needs to have three months of history paying on their judgment per the written payment agreement. HUD allows borrowers with outstanding tax liens to qualify for an FHA loan. A written payment agreement and three months of payment seasoning on the agreed-upon monthly payment are required. This is not the case with conventional loans. Fannie Mae and Freddie Mac allow borrowers with outstanding tax debts to qualify for a conventional loan. However, it cannot be a tax lien. The borrower needs to make one payment to the IRS per the written payment agreement to qualify for a conventional loan.

About The U.S. Department Of Housing And Urban Development

The United States Department of Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA). HUD has very lenient guidelines on credit and debt to income ratio. HUD Derogatory Credit Guidelines allow for borrowers with prior bad credit to qualify for FHA Loans. Under HUD Derogatory Credit Guidelines, borrowers with outstanding collections and charge-offs can qualify for FHA Loans without having to pay them off. Under HUD Derogatory Credit Guidelines, borrowers can have bad credit and low credit scores to qualify and get AUS Approval. However, borrowers need re-established credit and timely payments in the past 12 months to get an approve/eligible per automated underwriting system. FHA Manual Underwriting Guidelines require timely payments in the past 24 months.

HUD Derogatory Credit Guidelines Versus Lender Overlays

All lenders do not have the same FHA lending requirements.

  • All lenders need to meet minimum HUD Mortgage Guidelines.
  • However, lenders can have their own additional FHA Lending Requirements called overlays.
  • Under HUD Derogatory Credit Guidelines, borrowers do not have to pay outstanding collections and charge off accounts to qualify for FHA Loans.
  • However, a lender may require all outstanding collections and charge off accounts to be satisfied
  • This is often the case with many banks.
  • Same with credit scores.

Minimum Credit Score Requirements On FHA Loans

What are the minimum creditworthiness requirements for FHA loans

Under HUD guidelines, the minimum credit score to qualify for 3.5% down payment FHA Loans is 580 FICO. The minimum credit score required to qualify for an FHA loan is 500 FICO. However, if the borrower has lower than 580 credit scores, a 10% down payment is required versus a 3.5% down payment. However, many lenders normally have higher credit score requirements. All lenders need to meet the minimum HUD Agency Guidelines on credit score and other lending requirements. However, lenders are allowed to require higher lending requirements. These higher lending requirements by lenders is called lender overlays. Most banks have credit score overlays of 640 FICO. Other mortgage lenders have 620 credit score requirements. All bad credit borrowers need to meet HUD Derogatory Credit Guidelines. Gustan Cho Associates has no overlays on FHA Loans. We just go off automated underwriting system findings.

HUD Mortgage Guidelines To Qualify For FHA Loans

Here are basic HUD Mortgage Guidelines To Qualify For FHA Loans:

  • To qualify for 3.5% Down Payment FHA Loans, borrowers need to have at least 580 FICO
  • Borrowers under 580 FICO down to 500 credit scores are eligible to qualify for FHA Loans with a 10% down payment
  • All borrowers need to get an approve/eligible per automated underwriting system
  • Borrowers with referred/eligible per automated underwriting system findings can qualify for FHA Manual Underwriting
  • Outstanding collections and charge offs do not have to be satisfied
  • Borrowers can qualify for FHA Loans with outstanding judgments and tax-liens
  • However, borrowers need a written payment agreement with the judgment creditor and/or IRS 
  • Three months of payments need to have been made
  • Lenders need to see three months of canceled checks and/or bank statements made to the judgment creditor and/or IRS
  • The two-year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Loans
  • The three-year waiting period to qualify after foreclosure, deed in lieu of foreclosure, short sale
  • Borrowers in an active current Chapter 13 Bankruptcy Repayment Plan can qualify one year into the repayment plan with Trustee Approval
  • Chapter 13 Bankruptcy does not need to be discharged to qualify for FHA Loans
  • There is no waiting period to qualify after the Chapter 13 Bankruptcy discharged date

Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders due to lender overlays. Gustan Cho Associates is one of the very few lenders licensed in multiple states with no lender overlays on FHA, VA, USDA, and Conventional loans.

HUD Derogatory Credit Guidelines: Medical Versus Non-Medical Collections And DTI Calculations

FHA does not require outstanding collections and charge offs to be satisfied. However, with non-medical collections with sums over $2,000, HUD requires lenders to take 5% of the outstanding collections and use it as a monthly hypothetical debt for DTI Calculations. This is only on non-medical collections. Medical collections and charged-off accounts are exempt from this 5% rule. There is no maximum amount of outstanding collections and/or charge off accounts. Borrowers can qualify for FHA Loans no matter how large the outstanding collections and the charged-off amount is.

Qualifying With A Lender With No Lender Overlays On HUD Derogatory Credit Guidelines

What is qualification with a lender without lender overlays

Borrowers who need to qualify for FHA Loans with derogatory credit, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We are available 7 days a week, evenings, weekends, and holidays.

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