April 25, 2017
A reader got in touch about bad credit home loans in our comments section this week. “I am looking for companies/banks/ or mortgage companies that help people refinance during bankruptcy 13 and bad credit.”
Does the FHA single family home loan program offer “bad credit” FHA mortgages?
This reader comment/question shows that there are still some misconceptions about how the FHA loan program works. There’s no such thing as a “bad credit” FHA mortgage. Borrowers either qualify for the home loan or they don’t. But what are the actual standards for FHA loan approval?
That’s complicated. There is a baseline minimum set of FICO scores that a borrower needs to have to even be considered under the FHA loan program. For maximum FHA financing with a required minimum down payment of 3.5%, a borrower must have a minimum FICO score of 580 or higher. That is the FHA standard, NOT the lender standard.
For applicants with FICO scores between 500 and 579, FHA loan rules say a mortgage is still technically possible, but with a higher down payment (10%).
But even borrowers with these scores may find that a “bad credit” FHA mortgage loan could be out of reach because lender standards are often higher than FHA minimum requirements.
You read that correctly, there are FHA loan standards and lender standards. The financial institution is free to require a higher FICO score for applicants as long as it does so in compliance with federal laws. Your bank can’t go BELOW the FHA minimums, but it can go higher.
What can a loan applicant do in cases where they are worried that their FICO scores may not be high enough to qualify? There are many courses of action to consider, but one of the most important ones? Contact the FHA directly to request a referral to a local, HUD-approved housing counselor who can assist with pre-purchase issues including building and maintaining a better credit rating.
Borrowers with bankruptcy issues will find this to be helpful, too. When dealing with bankruptcy there are mandatory waiting times that must be observed before the borrower can apply for a new mortgage loan. Depending on the nature of your bankruptcy you may be required to get the court’s permission to apply for a new mortgage.
Contact the FHA directly at their toll-free number, 1-800 CALL FHA to request a referral to a local housing counselor for more assistance in these areas.