FHA 203b loan credit requirements

Credit report graphicThe minimum credit score for an FHA home loan is 500 but a 10% down payment is needed if your credit score is less than 580. The standard down payment requirement of 3.5 percent of the sales price is necessary for applicants with a credit score of 580 or higher. The Federal Housing Administration allows lenders a lot of leeway when it comes to loan approval.

When reviewing a borrower's credit history, the underwriter must look at the entire pattern of credit behavior rather than simply individual instances of poor or delayed payments. Minor negative information that occurred two or more years ago does not need an explanation. Major indicators of poor credit, such as judgments, collections, and other recent credit issues, need a thorough written explanation from the borrower. The explanation must be logical and consistent with the rest of the credit information in the file.

Inability to Establish a Credit History

The borrower's lack of a credit history, or the borrower's choice not to utilize credit, may not be used to reject the loan application. Some potential borrowers may not have a credit history.

For these customers, including those who do not utilize conventional credit, the lender must acquire a non-traditional-merged credit report (NTMCR) from a credit reporting business or create a credit history with a credit-reporting firm.

  • Utility payment receipts
  • Payments for rent
  • Vehicle insurance premiums, as well as alternative methods of direct credit provider access, as specified in HUD 4155.1 4.C.1.e.
    Debts and inquiries that are recent and/or unknown

Lenders must establish the reason for any recent debt, since the borrower may have acquired the debt in order to get the necessary financial investment.

Any substantial debt that appears on a borrower's credit record but is not mentioned on the loan application must be explained satisfactorily.

All queries displayed on the credit report in the previous 90 days must be accompanied by a written explanation.

Judgments and Collections

Collections and judgements demonstrate a borrower's respect for credit commitments and must be taken into account in the creditworthiness analysis.

When a borrower has collection accounts or judgments, the lender must record the grounds for granting a mortgage.

All collections and judgements must be explained in writing by the borrower.

Resolving Collections and Judgments

As a condition of mortgage approval, the FHA does not require collection accounts to be paid off.

Court-ordered judgments, on the other hand, must be paid off before the mortgage loan is eligible for FHA insurance endorsement.

Exemption: A borrower may request an exception to the payment of a court-ordered judgment if he or she has

  • a contract with the creditor to make regular and on-time payments, and
  • supplied evidence demonstrating that payments were made in accordance with the agreement.

Previous Foreclosure on a Mortgage

House with a foreclosure signA borrower is usually ineligible for a new FHA-insured mortgage if, during the preceding three years, he or she has:

  • His/her former main home or other real estate was foreclosed on, or
  • He/she executed a deed-in-lieu-of-foreclosure.

Exception: If the foreclosure occurred as a consequence of documented mitigating circumstances beyond the borrower's control, such as a severe illness or the loss of a wage earner, and the borrower has subsequently reestablished excellent credit, the lender may waive the three-year rule.

Divorce is not seen as a mitigating circumstance.

However, if the borrower's loan remained current at the time of the divorce, the ex-spouse purchased the property, and the debt was later foreclosed, an exemption may be granted.

Extenuating factors do not include an inability to sell the property as a result of a job transfer or relocation to a different area.

Bankruptcy under Chapter 7

Bankruptcy-graphicA Chapter 7 bankruptcy (liquidation) does not invalidate an applicant from obtaining an FHA-insured home mortgage if, at the time of application, a minimum of two years has passed since the day of the discharge. During the two year time period, the applicant needs to have:

re-established a good credit history; or
chose not to open new credit accounts.

An elapsed period of less than 2 years, but not less than one year, may be acceptable, if the applicant:

  • can show the lender that the personal bankruptcy was triggered by mitigating situations past the applicant's control; and also
  • has since demonstrated a proven ability to handle their financial affairs.

A Chapter 13 personal bankruptcy does not invalidate a borrower from gettng an FHA-insured mortgage, if at the time of application a minimum of twelve months of the bankruptcy has elapsed.

The lender has to determine that the applicant's payment record has been satisfactory and all required credit payments have actually been made promptly; and also the applicant has received written permission from the bankruptcy court to obtain a home loan purchase.

Short Sales

House with a short sale signIf a borrower obtained a short sales agreement on his or her main property to prevent foreclosure, he or she will not be eligible for a new FHA-insured mortgage.

Take advantage of the market's decline, and

purchase a comparable or better home within an acceptable commuting distance at a lower price than the current market value.

Borrower was in good standing at the time of the short sale.

The new insured mortgage shall be considered eligible by a borrower until all of the following criteria are fulfilled on the date of the loan application for the new mortgage:

For the 12-month period before the short sale, mortgage payments on the previous mortgage were paid within the month due, and

Payments on installment debt for the same time period were likewise paid within the month due.
At the time of the short sale, the borrower was in default.

For three years from the date of the preforeclosure sale, a borrower who is in mortgage default at the time of the short sale (or preforeclosure sale) is ineligible for a new FHA-insured mortgage.

In the case of a borrower who sold his or her property through the Federal Housing Administration's pre-foreclosure sale program, that person is not eligible for a new FHA-insured loan from the day that the Federal Housing Administration settled an agreement.

Exemption: If a borrower is in default on his or her mortgage at the time of the short sale, a lender may make an exception to this provision.

The default was caused by events beyond the borrower's control, such as the loss of the main income earner or a long-term uninsured sickness, and

An examination of the credit record reveals good credit prior to the occurrence of circumstances beyond the borrower's control that resulted in the default.

SOURCE: FHA Borrower Credit Analysis