FHA Minimum Credit Score Requirements To Get Mortgage Approval
The FHA minimum credit score requirements to get mortgage approval on FHA loans is 500 FICO. One of the most common questions I have been getting recently from my viewers is what are FHA Minimum Credit Score Requirements to qualify for an FHA loan with a 3.5% down payment. Many folks who contact me are often confused.
HUD, the parent of FHA, has set very lenient mortgage guidelines on FHA loans to promote home ownership to first-time homebuyers, borrowers with no credit scores, homebuyers right out of school and college, borrowers with high-debt-to-income ratio, and homebuyers with bad credit.
This is because they get different answers when they consult with loan officers at other lenders as to the question of what the FHA Minimum Credit Score Requirements are. Unfortunately, many loan officers only tell borrowers FHA Minimum Credit Score Requirements are from their lending institution. NOT what the actual credit score requirements are per HUD Guidelines on Credit Scores. In this article, we will discuss and cover the minimum credit score requirements to qualify for FHA loans.
FHA Minimum Credit Score Requirements For AUS Approval
Some loan officers tell borrowers FHA minimum credit score requirements are 640. While others tell them it is 620. These loan officers are actually telling borrowers that the 640 Credit Scores, or 620 FICO. FHA Minimum Credit Score Requirements of the mortgage company they represent may be higher than the minimum required by HUD.
HUD, the parent of FHA sets the minimum agency mortgage guidelines on FHA loans. However, each individual lender can have higher lending requirements called lender overlays. Not all lenders have the same overlays on FHA loans. As long as you meet the minimum HUD agency mortgage guidelines, you are able to get approved for an FHA loan with a lender that has no overlays on FHA loans.
Lenders can have higher credit score requirements and NOT the actual Credit Scores Required by HUD . The credit scores they are stating are that particular lender’s Overlays On Credit Scores. NOT HUD’s FHA Minimum Credit Score Requirements. HUD, the United States Department of Housing and Urban Development, is the parent of the FHA. The Federal Housing Administration and FHA is the entity that sets FHA Minimum Credit Score Requirements.
HUD Guidelines FHA Minimum Credit Score Requirements on Home Purchase
Here is HUD’s Minimum Credit Score Guidelines on FHA loans:
- Borrowers with credit scores of at least a 580 FICO, can qualify for an FHA loan with a 3.5% down payment
- The maximum debt to income ratio allowed is 46.9% front-end and 56.9% back-end DTI to get an approve/eligible per Automated Underwriting System (AUS)
If a borrower has a credit score of at least a 580 Credit Score, borrowers can qualify for FHA Loans with a 3.5% down payment. A borrower with credit scores of under 580 and down to 500 FICO can qualify for FHA Loans with a 10% down payment as long as the borrower can get an AUS approval or via manual underwriting with compensating factors.
HUD Guidelines on Home Purchase Loans
The HUD 4000.1 FHA Handbook is the latest Guidelines Mortgage Lenders need to follow in order to originate and fund FHA loans. Changes in HUD Guidelines do happen with little to no notice. This happens without notice due to changes in mortgage requirements because of legislation and regulations. These changes can happen often and lenders and consumers need to be aware of these changes.
FHA loans are the best mortgage loan option for homebuyers with bad credit and lower credit scores. HUD, the parent of FHA, has set lenient mortgage guidelines to promote home ownership for first-time homebuyers, borrowers with bad credit, and homebuyers with credit scores down to 500 FICO.
HUD Guidelines that were effective a year ago may no longer be good today. FHA Minimum Credit Score Requirements on require 3.5% down payment is set at 580 Credit Score. Per HUD agency mortgage guidelines, homebuyers with credit scores down to 500 FICO are eligible for an FHA loan. However, borrowers with credit scores under 500 FICO and down to 500 FICO need a 10% down payment on a home purchase.
How Low Can Borrowers Credit Scores Be To Qualify For Loans
Borrowers with credit scores between and 579 FICO Credit Scores can qualify for FHA Loans. However, these borrowers are limited to 90% LTV, Loan To Value. This means a 10% down payment is required. Any borrower with under 500 Credit Scores is not eligible until they can get their credit scores to a 500 FICO Minimum.
Even though HUD guidelines allow homebuyers with credit scores down to 500 FICO to be eligible for an FHA loan with a 10% down payment, many individual mortgage lenders have overlays on credit scores. What this means is even though HUD allows borrowers with a 10% and 500 credit score to purchase a home, the lender can say NO. Non-QM Mortgage Brokers has no lender overlays on FHA loans for borrowers with credit scores down to 500 FICO.
Again, for anyone with credit scores of under 580 credit scores, a 10% down payment is required. Although HUD states borrowers with under 580 FICO credit scores and 10% down payment are eligible for FHA loans, borrowers will need to get an approve/eligible per automated underwriting system. Borrowers with credit scores under 580 FICO will get higher rates. It is best to get credit scores boosted to at least a 580 FICO.
Advice In Raising Credit Scores To Qualify For Mortgage
You can qualify for an FHA Loan with low credit scores. As mentioned above, it is best to try to raise your credit scores to at least a 580 FICO Credit Score and then apply for an FHA instead of trying to get a pre-approval under a 580 FICO Credit Score. Many folks do not realize how easy and streamlined it can be in trying to raise your credit score. Here are some quick tips on boosting your credit scores so you can qualify for a mortgage.
How To Boost Credit Scores To Qualify For A Mortgage
Consumers with no revolving credit tradelines, just getting one to three secured credit cards with at least a $500 credit limit can boost credit scores. One secured credit card can boost your credit scores by at least 20 or more FICO points. If you have a family member who lives with you at the same address or a family member with the same last name, adding yourself as an authorized user to their credit card will boost credit scores. It automatically treats it as seasoned credit tradelines. However, the main cardholder had to have had a perfect payment history with no late payment.
How To Maximize Your Credit Scores
Need very low credit utilization ratio which means a credit card balance of 10% of the available credit limit. HUD exempts credit disputes on medical collection accounts. If you have recent medical collection accounts, dispute them. Whenever you do a credit dispute, the credit bureaus will take that derogatory credit item from the FICO credit scoring model. So it is like not having that derogatory credit item.
The team at Non-QM Mortgage Brokers are experts in helping borrowers maximize their credit scores so they can qualify for a mortgage and get the lowest rates. You do not need to hire an expensive credit repair company to help you rebuild your credit.
Therefore, it will boost consumer credit scores. However, this technique needs to be timed properly. It is only good for a short-term band-aid and remedy and not a long-term solution. Borrowers getting the runaround from other lenders do not qualify for FHA Loans because they have credit scores under 620 FICO, please contact us at Non-QM Mortgage Brokers at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
FHA Loan Requirements on Collection Accounts
Besides the lenient requirements with regards to low credit score requirements, FHA Loans allow borrowers with the following qualify:
- open collections
- charge offs
- late payments
- prior bankruptcies
- prior foreclosures
- prior deed in lieu of foreclosures
- short sales to qualify for FHA Loans
- FHA Loans are the most popular mortgage loan program in the United States for homebuyers with less than perfect credit and scores down to 500 FICO.
Makes first-time home buyers and home buyers with bad credit or high debt to income ratios a chance to become homeowners with only a 3.5% down payment.
FHA Loans Benefit Homebuyers With Less Than Perfect Credit
A home buyer can qualify for FHA Loans with credit scores as low as 500 credit scores. However, to qualify for a 3.5% down payment FHA loan, the buyer needs a minimum credit score of 580. Homebuyers with credit scores below 580, a 10% down payment are required. Many lenders do have overlays on credit scores.
It is very important to understand the basic minimum HUD agency guidelines if you have bad credit. If a lender tells you that you do not qualify for an FHA loan, you will know you qualify at a different lender if you meet the minimum HUD guidelines. Non-QM Mortgage Brokers has zero lender overlays on FHA loans.
They set higher credit score standards than the minimum FHA credit score minimum requirements of 580. Most mortgage lenders will have some lender overlays. Common lender overlays are overlays on credit scores, debt-to-income ratio, gift funds, manual underwriting, credit tradelines, collections, and charge-off accounts.
What Are FHA Lender Overlays
Borrowers can qualify for FHA Loans With Low Credit Scores with lenders with no overlays. FHA lender overlays are mortgage lending requirements and standards that are set by the individual lenders that surpass the minimum HUD lending guidelines. For example, the minimum credit score to qualify for a 3.5% down payment home purchase loan set by the Federal Housing Administration is 580 credit scores.
Non-QM Mortgage Lenders has no lender overlays on FHA loans. The team at Non-QM Mortgage Brokers only follow HUD 4000,1 FHA Handbook agency guidelines and does not add a single lender overlay on FHA loans.
However, a bank may ignore the minimum FHA lending guidelines of the 580 minimum credit scores. The bank may have a credit score overlay that their institution requires at 640 credit scores. It is not against the law for a lender to have higher lending requirements than those set by HUD. All lenders need to follow the minimum FHA lending guidelines. However, each mortgage company can have higher standards than the minimum FHA lending guidelines which are called overlays.
FHA Minimum Credit Score Requirements Versus Bad Credit
Borrowers can qualify for FHA loans with low credit scores. However, mortgage lenders will also review borrower’s overall credit history. Borrowers can qualify for FHA loans with bad credit as well as unpaid collection accounts. However, most lenders want to see re-established credit from the borrower for the past 12 months. Credit scores and income is very important. But credit payment history is equally as important.
How Mortgage Underwriters View Prior Bad Credit Versus Recent Late Payments
Most lenders do realize that consumers can go through periods of bad credit due to the following:
- unemployment
- divorce
- business failure
- medical issues
- But they want to see that the period of bad credit was due to extenuating circumstances and not due to being financially irresponsible
- The overall credit history will be reviewed
The period of bad credit will be addressed and a detailed letter of explanation will be required.
Frequently Asked Questions By Homebuyers With Bad Credit
Borrowers with unpaid collection accounts, do not pay them until they have consulted with a licensed mortgage loan originator. Paying old collection accounts will drop credit scores and re-activate the statute of limitations.Borrowers can qualify for FHA Loans with the following:
- unpaid collections
- charge offs
- judgments
- tax liens
- other derogatory credit
How HUD Views Collections And Derogatory Tradelines
FHA does not require to pay off the unpaid collection accounts in order to qualify for an FHA insured mortgage loan. FHA does not count medical collections. All medical collections are not counted and exempt from debt to income calculations. HUD does allow borrowers to qualify for an FHA Loan with unpaid non-medical collection accounts but there are certain rules. Non-medical collections with an aggregate balance of $2,000 or less are exempt from DTI calculations.
Types Of Derogatory Credit Tradelines
For aggregate unpaid non-medical balances of greater than $2,000 in aggregate balance the following guidelines apply:
- 5% of the unpaid collection balance will be counted towards calculating the debt to income ratio of borrowers
- This can be a problem if the borrower has a high unpaid collection balance
For example, unpaid collection balance of $10,000:
- 5% of the $10,000 or $500 will be used as a monthly expense
- The mortgage loan underwriter will count it towards calculating the borrower’s debt to income ratios
- The good news is that if the borrower has a written payment agreement with the collection agency, the mortgage underwriter will use the monthly written payment agreement with the collection agency in lieu of the 5% unpaid collection balance
So with the $10,000 unpaid collection balance, 5% of the $10,000 or $500 will be exempt if a lower monthly payment agreement is agreed upon with the collection agency. If the monthly written payment agreement has been agreed to $200, then the $200 will be used as the monthly payment instead of the $500. There is no seasoning requirement with the payment history. The day borrower has a written payment agreement with the collection agency is the date that the deal is effective. Charge-off accounts are ignored by FHA with debt to income ratio calculations.
HUD Guidelines on Judgments and Tax Liens
Borrowers can qualify for FHA Loans with judgments and tax liens without having to pay it off in full. As long as borrowers have a written payment agreement with the judgment creditor and/or the Internal Revenue Service and have made at least three months. payments, they should qualify for an FHA Loan. Written payment agreement and three months of canceled checks need to be provided.
FHA Minimum Credit Score Requirements To Get Approved on FHA Loans
Borrowers who meet the minimum FHA Lending Guidelines but were told by a bank or mortgage lender they do not qualify for an FHA loan due to their overlays, please contact us at Non-QM Mortgage Brokers at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
