December 2, 2021

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FHA Loans: The Credit Check

Buying A Home With A Lower Credit Score

FHA loan rules in HUD 4000.1 give instructions to the lender on how to establish an FHA borrower’s creditworthiness. FHA loan rules tend to be more flexible on credit issues than their conventional equivalents, but borrowers are still required to financially qualify.

Are you looking for a condo loan, a mobile home loan? There’s an FHA loan for that. Do you want to build a house on your own land with an FHA construction loan?

Some don’t realize the credit requirements in the FHA Lender’s Handbook are identical. For construction loans, borrowers should expect slightly higher credit requirements from the lender. But on paper, FHA loan rules make no distinction between different loan types and the minimum FICO score needed to qualify for maximum financing.

One area that is also covered in HUD 4000.1 is what the lender should do if collection actions exist in the borrower’s credit report; collection action on a loan applicant’s record may be cause for the lender’s concern, but there are instructions to the lender on how to view collection accounts.

Do you know what is required in such cases under FHA loan rules to permit the loan to move forward? The FHA Lender’s Handbook, HUD 4000.1, says;

“A Collection Account refers to a Borrowers loan or debt that has been submitted to a collection agency by a creditor.” In cases where such an account is present the lender is instructed as follows:

“If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:

  • Verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
  • Verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrowers Debt To Income (DTI); or
  • If a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrowers DTI.”

And what about situations where there are collection accounts on a non-borrowing spouse’s record in “community property” states? A community property state is one where state law may have a say in how a legally married couple’s joint debts are viewed or handled in the eyes of the law:

“Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless excluded by state law.”

FHA loan rules say your lender is required to provide the following documentation related to collections:

  • Evidence of payment in full, if paid prior to settlement;
  • The payoff statement, if paid at settlement; or
  • The payment arrangement with creditor, if not paid prior to or at settlement.

If your lender uses five percent of the outstanding balance, no documentation is required.

Joe Wallace - Staff Writer

By Joe Wallace

February 19, 2021

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for for (8) years and is currently the Associate Editor for

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About was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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