FHA Credit Score and FICO Requirements for FHA Mortgages
Credit Scores
FHA mortgages are not credit score driven unlike most other mortgage loans on the market today. For non-FHA or conventional loans your interest rate and credit score are on a sliding scale. This means that the higher your credit score is, with a conventional lender, the lower your qualifying interest rate will be. Conversely, a lower credit score will yield a higher qualifying rate and require a larger down payment (10%-20%). As of today, if you do not have a 700 credit score or better you are required to put down 20% when buying a home with a conventional loan. Conventional lenders work their loan programs this way because as a lending rule of thumb, the lower your credit score is - the higher the risk factor for the lender. For a conventional loan you may need anywhere from a 680 fico score to a 720 to qualify for their lowest rates while FHA mortgages can offer better rates and more flexible terms with just a 600 credit score or higher.
Qualifying with a Score Below FHA Guidelines
In some cases FHA borrowers can qualify for a FHA mortgage with a score under 600. With a 580 credit score you may be able to qualify for a limited selection of FHA insured mortgage products. A borrower may be able to purchase a home or refinance with the intent of obtaining a lower rate or decreasing the term of the loan (known as a rate and term refinance.) This type of special qualification would require that the borrower not take any additional cash out of the equity in the home but would still offer rates around 5% fixed. There are also limited lending options available for borrowers with a 560 credit score. It is best that you speak with a FHA mortgage specialist so they can determine exactly what you qualify for. Click here to have one of our FHA specialists assist you.
FHA Loan Credit Issues
Before approving a loan, the lender analyzes the integrity of the borrower's past credit performance. Those who have a good credit history demonstrated by a solid track record of timely payments will likely be eligible for a loan. Potential borrower's whose credit history is marred by slow payments, poor financial judgment and delinquent accounts are not a good candidate for a loan approval.
Two lines of credit are necessary to apply for an FHA loan. However, in the event a borrower does not have sufficient credit on their credit report the FHA will allow substitute forms. Substitute trade lines may consist of a phone bill, electric bill, cable bill…etc
FHA will consider approving a borrower who is still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The court trustee's written approval will also be needed in order to proceed with the loan. The borrower will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.
At least two years must have elapsed since the discharge date of the borrower and / or spouse's Chapter 7 Bankruptcy, according to FHA guidelines. This is not to be confused with the bankruptcy filing date. A full explanation will be required with the loan application. In order to qualify for an FHA loan, the borrower must qualify financially, have re-established good credit, and have a stable job.
During an underwriter analysis of borrower credit, the overall pattern of credit behavior is being reviewed rather than isolated cases of slow payments. If a good payment pattern has been maintained, regardless of a specific period of financial difficulty preceded it, the borrower may escape disqualification.
FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. However, if the foreclosure of the borrower's main residence was the result of extenuating circumstances, an exception may be granted if they have since established good credit. This does not include the inability to sell a home when transferring from one area to another.
A collection is minor in nature usually does not need to be paid off as a condition for loan approval. It is stated as such in FHA guidelines. Any judgments will have to be paid in full prior to closing. Borrowers who are delinquent on any federal debt, such as tax liens, student loans, etc., are not eligible.
Missed Mortgage Payments
If you are refinancing or buying a new home and have been 30 days late on your previous mortgage in the last 12 months that is okay; but if you have been more than 30 days late, or 30 days late but on 2 or more occasions in the last 12 months, you will run into some trouble when applying for a FHA home loan even if your credit score is above the FHA credit score qualification guidelines.
Non-traditional credit qualification (no credit)
If you can not document or prove credit history through traditional means that would normally appear on a traditional credit report (credit cards, car loan or lease, personal loans etc) FHA home loans allow you to qualify using "non-traditional" credit to verify and establish credit history. This practice is appropriate when a borrower has insufficient credit trade lines with Equifax, Trans Union and Experian. Click here to read more about non-traditional credit qualification guidelines and requirements.
