FHA Loans Under 620 FICO Mortgage Guidelines
One of our frequently asked questions by homebuyers is can I qualify for FHA loans under 620 FICO credit scores? FHA mortgages have some of the most forgiving guidelines among mortgage programs. The official program guidelines from the US Department of Housing and Urban Development (HUD) state that borrowers can be eligible for an FHA home loan with FICO credit scores as low as 580 with 3.5% down and as low as 500 with 10% down. Fannie Mae and Freddie Mac loans, in comparison, set their minimum credit score at 620.
Qualifying for an FHA Under 620 FICO
FHA mortgage guidelines are very flexible compared to other program requirements. You may qualify with a credit score as low as 500. You can get an FHA mortgage 12 months after filing for a Chapter 13 bankruptcy if you make your payments on time and your bankruptcy trustee approves. It’s possible to get an FHA home loan a year after you discharge a Chapter 7 bankruptcy.
You must reestablish credit and prove that the bankruptcy was not your fault and was out of your control. That’s rare, however. In most cases, you must wait two years after Chapter 7 bankruptcy to be eligible for FHA mortgage financing. You have to wait three years after a mortgage foreclosure or deed-in-lieu of foreclosure to apply for an FHA home loan. It’s possible to get an FHA mortgage with open collections. It’s possible to get an FHA mortgage with unpaid judgments if you’re making regular, timely payments under an agreement with your creditor.
Low Credit Scores Does Not Mean “Bad Credit”
Understand that while FHA guidelines allow low credit scores, however, they don’t allow genuinely bad credit. HUD’s guidelines state, “Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments unless there is major derogatory credit on his/her revolving accounts.”
In addition, says HUD, “The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments.” There are reasons for low credit scores that have nothing to do with your repayment history. Your score can be low because of limited or short credit history because your balances are high or you have too many accounts. You have a much better chance of securing FHA loan approval if your credit score is low but your credit history is okay.
FHA Loans Under 620 FICO: What’s the REAL Minimum Credit Score for an FHA Mortgage?
All borrowers must meet HUD’s minimum qualifications to be eligible for FHA financing. However, lenders can set stricter requirements than the official FHA guidelines. Not all lenders are the same and guidelines can vary widely. The official FHA guidelines might say you can get a home loan with a 580 credit score and 3.5% down, but most lenders have higher minimum credit scores than this — 620, 640, or even higher.
Do All FHA Lenders Have The Same FHA Loan Requirements On FHA Loans?
These stricter requirements are called “lender overlays” and they are perfectly legal. Just because you do not qualify for an FHA loan at one lender does not mean that you cannot qualify at a different lender with no lender overlays. If you’re concerned about qualifying, it’s smart to ask lenders about their overlays before you waste time applying with them.
Mortgage Lenders For Bad Credit, Inc. imposes NO OVERLAYS on home loans including FHA mortgages. So if you’re wondering, ” Can I get a mortgage loan if my credit scores are under 620?” The answer is yes; you’re eligible to apply for an FHA mortgage with a credit score of 580 with 3.5% down and 500 with 10% down.
How to Improve Your Chances of FHA Loans Under 620 FICO
FHA guidelines state that “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. “Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”
How Mortgage Underwriters Look at Credit Scores Versus Payment History
If your credit score is low because you don’t use much credit or because you have a lot of accounts, you’ll probably be able to get a mortgage if you meet other program guidelines. But if your score is low because of poor repayment history, you’ll need compensating factors. What are compensating factors that can overcome bad credit history? Here’s a list of the most common ones.
When Are Reserves Required on FHA Loans
There are instances where mortgage underwriters reserve. All FHA manual underwriting requires one month of reserves on single-family homes. Multi-unit properties require one to three months of reserves. Two-unit properties require one-month reserves. Three to four-unit properties require three months of reserves.
This is money you’ll have after closing on your mortgage that can be used to make your payments. Reserves are measured in months. If your mortgage payment is $1,000 and you have $3,000 in savings, that’s three months of reserves. Having at least two months of reserves after closing is considered a compensating factor.
HUD Guidelines on Payment History on FHA Loans
FHA guidelines state that lenders should not deny a loan application because the borrower doesn’t use a lot of credit. In fact, less debt can be considered a good thing if it frees up more money to pay your mortgage. You can get an approve/eligible with outstanding collections and charge-off accounts and late payments as long as you have been timely for the past 12 months. If you are late with any of your monthly payments that report to the credit bureaus, it will be difficult to get an automated approval per AUS.
How Mortgage Underwriters Look at Second Source of Income
Some sources of income may count officially when you apply for a home loan. For instance, part-time job income only counts if you’ve been receiving it for two years. Ditto self-employment income, commission income, and bonus income. However, that uncounted income is still there and available to help you pay your home loan. Lenders can’t use it for your qualifying debt-to-income ratios, but they can count it as a compensating factor.
Putting The Minimum Versus Higher Down Payment
This one doesn’t make the list of compensating factors but automated underwriting systems (AUS) do calculate your risk based on your income, credit, and down payment. Higher down payments mean less risk to lenders and often a higher down payment can get you a loan approval when the minimum isn’t enough.
FHA Loans Under 620 FICO With Outstanding Collections and Charge Offs
FHA mortgage borrowers can qualify without paying collections and charge-offs. Do not pay any older collection accounts before applying. This can actually drop your credit score. Ask your loan officer before paying for a newer collection. Paying a medical collection can improve your score because medical collections disappear if you pay them.
FHA Loans Under 620 FICO With Collections
Paying a newer non-medical collection account may help your score if you’re able to negotiate a “pay for delete” with the collection agency. “Pay for delete” means getting the creditor to agree in writing to remove derogatory credit report entries if you pay the balance. Don’t do anything unless your lender tells you to, however. Borrowers can get FHA loan approval with outstanding collection and charge-off accounts. Judgments are different from collection accounts. Paying off a judgment will not drop your credit scores. Your lender may require this before you can close on your mortgage.
Best Mortgage Lenders For Bad Credit
Please consult the advice of a mortgage broker/banker prior to taking any measures on paying collections, charge-offs, or judgments. If you have any questions about the contents of this article and/or other mortgage-related topics, please contact us at Mortgage Lenders For Bad Credit, Inc. at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Mortgage Lenders For Bad Credit is available 7 days a week, evenings, weekends, and holidays.
FHA loans For Borrowers With Low Credit Scores
Not all lenders have the same lending requirements for government-backed and conventional loans. This holds especially true for FHA home loans. FHA loans are popular with borrowers who have some qualifying hurdles. These include lower credit scores, smaller down payments, and higher debt-to-income ratios. It is easier to get an approve/eligible decision from an automated underwriting system, even with a low credit score, through the FHA program than most other mortgages.
What Are FHA Lender Overlays?
Borrowers must meet the minimum HUD mortgage guidelines for FHA loans. However, each lender can add stricter requirements called lender overlays. These overlays can make it harder for applicants with bad credit scores to get loan approval. Most lenders add some overlays. However, Morgage Lenders With Bad Credit, Inc. has no lender overlays for government or conventional loans. HUD agency guidelines allow FHA approval for borrowers with credit scores as low as 500.
Getting FHA Mortgage Approval With Low Credit Scores
Over 75% of our borrowers at Mortgage Lenders For Bad Credit, Inc. are folks who either have gotten a last-minute loan denial or are stressing over their mortgage process because of lender overlays. Why is it that lenders have different credit score requirements? Most banks require a 640 credit score while most mortgage companies set minimum credit scores at 620.
However, the U.S. Department of Housing and Urban Development (HUD), the parent of FHA, established the minimum credit score of 580 for borrowers to qualify for 3.5% down payment home purchase FHA Loans. At Mortgage Lenders For Bad Credit, Inc. applicants can qualify for FHA loans under 620 FICO.
FHA Loans Under 620 FICO and Down To 500 Credit Scores
Borrowers can get approved for FHA loans under 620 FICO credit scores. However, getting approved for FHA under 620 FICO scores is not a guaranteed deal. There are stipulations on getting approved for FHA loans under 620 FICO. The automated underwriting system has been programmed to meet all the minimum agency mortgage guidelines of HUD on FHA loans. You can have outstanding collections, charge-offs, late payments, and other derogatory credit under one condition. That one condition is to have timely payments in the past 12 consecutive months.
Most FHA mortgage applications are underwritten by software called Automated Underwriting Systems, or AUS. The AUS weighs all factors in an application including debt-to-income ratio, credit score, income, down payment, and savings (called reserves). As long as the AUS issues an approve/eligible recommendation, you can get loan approval from Mortgage Lenders For Bad Credit, Inc.
What Does Refer/Eligible Per Automated Findings Mean?
If the software cannot issue an approval, it will come back with either a loan denial (refer with caution) or a requirement for manual underwriting. An application can require manual underwriting by a human if the system doesn’t have enough information (for instance, your credit report has no score). If your application cannot go through AUS, you’ll have a much harder time getting an FHA mortgage approval with a low credit score.
Can You Qualify for FHA Loans Low Credit Scores and Collections?
The Federal Housing Administration does not require you to pay all collections before closing on your loan. Charge-offs and older late payments are acceptable. However, recent late payments can be a problem. Mortgage underwriters do not want to see late payments in the past 12 months. You might be able to secure approval if there are extenuating circumstances.
However, a human underwriter has to look at the file. That’s because an AUS has no way of knowing if a late payment was your fault or not. Never pay an older collection account because it reactivates the derogatory credit item and makes it new again. Newer items on credit reports impact scores much more than older items. Information on the credit reports is included in decisions by Automated Underwriting Systems.
Contact Us for FHA Loans With No Overlays
If you have been denied a home loan by a bank, mortgage banker, or mortgage broker, please contact us at Mortgage Lenders For Bad Credit, Inc. at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. A good percentage of our borrowers have under 620 credit scores. And our borrowers can close their mortgage loans once they get an approve/eligible decision from an AUS. All of our pre-approvals are full credit approvals underwritten and signed off by our mortgage underwriters.
This guide on how to get approved for FHA loans under 620 FICO credit scores was published on October 22nd, 2022.
