Qualifying For FHA Loans With Bad Credit And Collections
This BLOG On Qualifying For FHA Loans With Bad Credit And Collections Was UPDATED On July 25th, 2019
Advice On Qualifying For FHA Loans With No Lender Overlays
FHA loans are mortgage loans that are originated by banks and private mortgage lenders.
- The United States Housing and Urban Development (HUD) is the parent of the Federal Housing Administration (FHA)
- FHA has nothing to do with the origination and funding of FHA Loans
- The mission and role of FHA are to guarantee HUD-Approved Lenders in the event Borrowers default on their FHA Loans
- FHA will insure the lender on the loss due to borrower default
- However, in order for HUD to insure FHA home loans, banks and lenders need to follow HUD Guidelines
About FHA Home Loans
- FHA loans are more popular now than ever
- FHA Home Loans is a great home loan program of making the dream of homeownership available to first time home buyers and those who have had prior bad credit
- Qualifying For FHA Loans has much more lenient qualifying standards than conventional loans
- Borrowers with high debt to income ratio can qualify for FHA loans where otherwise they could not have qualified for other loan programs like conventional loans
Not All FHA Lenders Have Same Guidelines
Every mortgage lender has different mortgage lending guidelines for FHA loans.
- One lender might require a minimum credit score of 640 FICO for their borrowers while others might have a 620 FICO requirement
- HUD minimum credit score requirements for 3.5% down payment FHA Mortgages is 580
- There are lenders that will even take a borrower with FICO scores as low as 500
- Borrowers who get denied by a lender for an FHA loan due to overlays can qualify for FHA Loans with a Lender with no lender overlays
- Every mortgage lender has different overlays when it comes to approving FHA loans
- Gustan Cho Associates has no overlays on government and conventional loans
Qualifying For FHA Loans With Outstanding Collections And Judgments
There are lenders that will approve borrowers who have open and unpaid collections.
- Most lenders will not approve anyone who has an unsatisfied judgment due to overlays on collections
- HUD Guidelines on collections and charge off accounts do not require that borrowers need to pay outstanding collections and charge offs
- Judgments and Tax Liens need to be addressed
- Borrowers need to either have a written payment agreement with judgment creditor and/or IRS with three months of payment history.
- Borrowers can pay off the outstanding judgment and/or tax liens at or prior to closing
- A payment agreement will be required and copies of canceled checks for borrowers with judgments and/or payment agreements with judgment creditors and/or Internal Revenue Service
Qualifying For FHA Loans With High Debt To Income Ratio
There are many folks who have great credit and have great income but a lot of debts.
- I have seen borrowers with credit scores of over 800 FICO and long job longevity but could not qualify for a conventional loan but qualify for FHA loans due to higher debt to income ratios
- Fannie Mae caps debt to income back end ratio at 45%
- Freddie Mac caps DTI at 50%
- HUD Guidelines On DTI is 46.9% front end and 56.9% back end to get an approve/eligible
- In cases like these, conventional loan borrowers need to turn to FHA loans
UPDATE On Qualifying For FHA Loans
Many changes have happened with FHA Loan Programs from the time this mortgage blog article was written and published.
- When this mortgage blog article post was published, the maximum FHA Loan Limit was $410,000
- Now the FHA Loan Limit has gotten reduced to $314,827 in most areas in the United States except for high-cost areas
- Many areas in California are deemed high-cost areas and the loan limits in most counties in California is $726,525 for FHA Loans
- In Chicago and its surrounding suburbs, FHA Loan Limits are at $368,000 for single-family units.
- Areas of Chicago that have FHA Loan Limits of $368,000 for single-family units are Cook County, Will County, McHenry County, Lake County, and DuPage County.