Understanding FHA Credit Score Requirements

Can I buy a house with bad credit? Can the FHA help?

Credit report graphic The minimum credit score requirement 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, require a thorough written explanation from the borrower. The explanation must be logical and consistent with the rest of the credit information in the file.

FHA Credit History Requirements

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 judgments 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 judgments must be explained in writing by the borrower.

Does FHA Require Collections to Be Paid Off?

The FHA does not require collection accounts to be paid off as a condition of mortgage approval.

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.

FHA Prior Foreclosure Guidelines

House with a foreclosure sign A 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.

With one exception, if the foreclosure was caused by proven mitigating circumstances outside of the borrower's control, such as a serious illness or the loss of a wage earner, the lender may not require the three-year rule to be used.

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.

FHA Chapter 7 Guidelines

Bankruptcy-graphic A 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 getting 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.

FHA Short Sale Guidelines

House with a short sale sign If a borrower obtained a short sale's 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.

The 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.

The Federal Housing Administration's pre-foreclosure sale program does not allow a borrower to get a new FHA-insured loan from the day that the FHA reached an agreement with the borrower.

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

Conclusion

In conclusion, the FHA loan credit requirements are much more lenient than those of other types of loans. This makes it a great option for people who may not qualify for other loans. If you are interested in obtaining an FHA loan, be sure to check with your lender to find out what the specific credit requirements are.

SOURCE:
Mortgagee Letter 10-29
Section a. Borrower Eligibility Requirements