August 16, 2017
Is my credit good enough for an FHA home loan? Borrowers need to know what FHA loan minimum credit standards are, but they will also need to find out what their participating lender’s credit requirements are above and beyond FHA loan minimums.
FHA Minimum Standards For FICO Scores
The FHA loan handbook, HUD 4000.1, lists the criteria the FHA requires to qualify for a home loan. For most FHA mortgage loans, borrowers who have FICO scores of 580 or higher qualify for maximum financing with the lowest down payment possible (3.5% of the adjusted value of the home or the purchase price, whichever is lower).
Borrowers with FICO scores between 500 and 579 may technically qualify for an FHA mortgage, but with a minimum 10% down. Borrowers with FICO scores lower than 500 do not qualify for an FHA mortgage loan.
The most important thing to know about this portion of the FHA requirements for FICO scores? That these numbes are the FHA minimum standard. Your lender may have credit requirements that are higher than this, so finding a lender who can work with your FICO scores is an important part of the process.
Credit History Requirements
Credit history is very important when it comes to FHA loan approval. In general you will find it strongly advisable to come to the FHA loan application process with 12 months of on-time payments for ALL financial obligations. Anything less could jeopardize your chances at loan approval.
Delinquent debts could be a problem unless a borrower has entered into a satisfactory repayment plan, especially where federal taxes or other debt is concerned. It’s best not to come to the home loan process until you have gotten some type of resolution (a payment agreement in writing, for example) with the creditor and can show a paper trail of that resolution and your successful participation in it.
Bankruptcy and Foreclosure
Potential FHA borrowers who have bankruptcy and/or foreclosures on their credit history are not automatically denied a home loan, but certain requirements must be met.
A mandatory waiting period is usually one of those requirements and depending on the type of bankruptcy and/or dates when the foreclosure officially took effect (rather than the date of filing or when action began) your waiting period could be between 12 months and three years.
In the case of bankruptcy, if a court’s permission is required to enter into new financial arrangements or obligations, that will be an important factor in how your loan may proceed.
Credit Activity During The Application Process
Borrowers need to be very careful when applying for a home loan. Your credit activity between the application and closing date may be monitored or re-evaluated, which means it is not a good idea to apply for any other type of credit in the meantime. Your debt-to-income ratio, your current and potential debt, and other issues could change if a credit line is approved. That may alter the lender’s ability to continue processing your loan depending on how those areas are affected.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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