HUD Credit Score Guidelines on FHA Loans

This guide covers HUD credit score guidelines on FHA loans. HUD, the parent of FHA, is the government agency that sets the minimum HUD credit score guidelines for FHA loans and other updated HUD guidelines. Many of our viewers today are reading this blog because they are getting conflicting reports on the HUD credit score guidelines for FHA loans. Borrowers often get conflicting answers to HUD credit score guidelines on FHA loans:

Not all lenders have the same HUD mortgage guidelines.  The minimum credit score requirements on FHA loans vary depending on each lender.

Some lenders may require a 620 credit score, while others require a 640 FICO. Yet other lenders may require 580, while some may go down to 500 FICO. So what is it? What is the minimum HUD credit score on FHA loans? There are two types of lending requirements for FHA loans. The HUD agency mortgage guidelines and lender overlays on FHA loans. The following paragraphs discuss the minimum HUD credit score guidelines for FHA loans.

Updated HUD Agency Mortgage Guidelines on FHA Loans

All borrowers need to meet the minimum agency guidelines from HUD, the parent of FHA. Individual lenders, called lender overlays, impose the second lending requirement.

Lender overlays are additional lending requirements imposed by individual lenders that are above and beyond HUD’s minimum agency guidelines.

Not all lenders have the same type of lender overlay. Gustan Cho Associates has no lender overlays on FHA loans. Gustan Cho Associates has a national reputation for not having any lender overlays on government and conventional loans.

HUD Credit Score Guidelines Versus Lender Overlays on FHA Loans

There are two types of FHA mortgage guidelines: HUD agency guidelines and lender overlays by mortgage companies. All lenders must comply with the minimum HUD agency mortgage guidelines, often called the HUD 4000.1 FHA Handbook—the HUD 4000.1 FHA Handbook lists all the agency guidelines on FHA loans.

Lenders may create and implement additional higher credit standards called lender overlays. Most lenders have lender overlays on just about anything and everything.

It is perfectly legal for the lender to have higher credit or income standards, called overlays. However, some lenders, like Gustan Cho Associates, have no lender overlays on government and conventional loans. Lender overlays are why the HUD credit score guidelines for FHA loans may differ among lenders.

HUD Agency Credit Score Guidelines

HUD, the Federal Housing Administration (FHA) parent, requires a minimum credit score of 500 FICO. However, for homebuyers to qualify with the least down payment possible, HUD requires a 580 credit score. The minimum down payment required for a 3.5% down payment FHA loan is 580 FICO.

Borrowers under 580 FICO are eligible to qualify for FHA loans. The down payment requirement is 10% for borrowers under 580 FICO. The lowest credit score borrowers can have to qualify is 500.

Borrowers will need to get an approve/eligible per automated underwriting system. If borrowers cannot get automated approval, the lender may downgrade the file to a manual underwrite. Manual underwriting needs a refer/eligible per automated underwriting system findings. Manual underwriting guidelines apply.

Findings of The Automated Underwriting System

Loan officers must input all FHA mortgages into the Automated Underwriting System (AUS) for automated findings. The AUS is a sophisticated automated computerized system that analyzes a borrower’s credit and income profile and makes an automated decision within seconds.

The automated findings will condition borrowers on automated finding approval. Although the borrower may meet credit score requirements and other HUD guidelines, they would need to get an approve/eligible per AUS.

The file must be downgraded to a manual underwrite if the borrower gets a refer/eligible per AUS. FHA and VA mortgages are the only two loan programs that allow manual underwriting. Borrowers need to meet the HUD manual underwriting guidelines, which one of the requirements is 24 months of timely monthly payments.

HUD Manual Underwriting Mortgage Guidelines

FHA and VA home loans are the only two mortgage programs that allow manual underwriting. The only difference between manual and automated underwriting is that the mortgage underwriter carefully analyzes the borrower’s debt-to-income ratio. It looks for compensating factors to justify approving the loan. Debt-to-income ratios on manual underwriting are as follows:

• 31%/43% with no compensating factors
• 37%/47% with one compensating factor
• 40%/50% with two compensating factors

The underwriter has discretion in exceeding the above debt-to-income ratio guidelines on manual underwriting if the borrowers have other strong compensating factors. Mortgage underwriters can utilize underwriter discretion in approving borrowers with strong compensating factors and a higher debt-to-income ratio above and beyond the manual underwriting debt-to-income ratio guides.

HUD Credit Score Guidelines Versus Timely Payments in The Past 12 Months

There are many instances where the automated underwriting system does not render an approve/eligible due to recent late payments. It is better to have a lower credit score and timely payments in the past 12 months versus high credit scores and recent late payments. Recent late payments in the past 24 months are frowned upon by all lenders.

One or two late payments in the past 24 months are not always deal killers. However, multiple recent late payments are considered high-risk borrowers by mortgage companies.

Layered risk by lenders is carefully analyzed with borrowers with lower credit scores. HUD Agency Guidelines allow borrowers with credit scores between 500 and 579 to be eligible for FHA loans. However, borrowers with 580 credit scores must put a 10% down payment versus a 3.5% down payment. This is due to the higher-layered risk the mortgage company and HUD take.

Understanding Overlays on Minimum Credit Scores For FHA Loans

Any lender can approve a high-credit borrower with lower debt-to-income ratios. However, that is not how the world works. Many good, hard-working folks have had credit or income issues. They have since recovered and can now qualify for a home mortgage. HUD, the parent of FHA, created and launched FHA loans to promote homeownership to first-time homebuyers and folks with prior credit issues.

One important thing borrowers need to realize is that not all lenders have the same FHA lending guidelines. Many have lender overlays.

Frequently Asked Questions (FAQs)

1. What is the credit score to qualify?

The minimum credit score is 500. Borrowers need a credit rating of at least 580 to qualify for the 3.5% initial payment option. Clients with credit scores between 500 and 579 must make a 10% down payment.

2. Can I use an FHA loan with a credit rating below 500?

No, FHA loans are unavailable to borrowers with credit scores under 500. HUD requires a minimum credit score of 500 for FHA loans.

3. How does my credit score influence my FHA loan approval?

Your credit score significantly influences FHA loan approval. Higher credit scores usually lead to better loan terms, such as lower interest charges and smaller down payments. Lower credit scores may require higher initial payments, which impacts loan approval chances.

4. What compensating factors can help if I have a low credit score?

Compensating factors that can help with a low credit score include:

• Larger down payment: Making a down payment greater than the minimum required.
• Low debt-to-income ratio: Always keep your debt-to-income ratio low.
• Ample cash reserves: Having substantial savings and reserves.
• Stable employment history: Showing a consistent and stable employment record.
• Additional income sources: Demonstrating other verifiable sources of income.

5. Do FHA loans require a credit score check?

Yes, FHA loans require a credit score check. Lenders will evaluate your credit report to assess your creditworthiness and eligibility for the loan.

6. How do I improve my credit score to qualify for an FHA loan?

To enhance your credit score for an FHA loan:

• Pay bills on time: Make sure to pay all bills punctually.
• Reduce debt: Lower your overall debt levels.
• Avoid new credit: Don’t apply for new credit accounts before and during the loan application process.
• Check your credit report: Review your credit report for errors and dispute any inaccuracies.
• Keep credit card balances low: Ensure they remain low relative to their limits.

7. Will a lender consider a non-traditional credit history for an FHA loan?

Yes, FHA guidelines allow lenders to consider non-traditional credit history for borrowers lacking traditional credit history. This can include records of timely rent payments, utility bills, and other recurring obligations.

8. How does manual underwriting work with low credit scores for FHA loans?

Manual underwriting involves a detailed review of your financial situation and compensating factors. It may be used if your credit score is low or automated systems flag other issues. Manual underwriters will evaluate your overall financial picture to make a lending decision.

9. How do collections and charge-offs impact my FHA loan application?

Collections and charge-offs can negatively impact your FHA loan application. However, lenders may still approve the loan if you can demonstrate compensating factors or if the debts are resolved. Paying off these debts can improve your chances of getting approved.

10. Can I obtain an FHA loan if I have experienced bankruptcy?

Yes, you can still be eligible for an FHA loan if you’ve had a bankruptcy or foreclosure, but certain waiting periods apply:

• Chapter 7 bankruptcy: You must stand by at least two years from the discharge date and show that you have re-established your credit.
• Chapter 13 bankruptcy: You can apply after one year of making timely payments under the repayment plan and with the court’s permission.
• Foreclosure: You must wait at least three years from the foreclosure date.

11. Do FHA loans offer better interest rates for higher credit scores?

Yes, borrowers with higher credit scores typically receive better interest rates on FHA loans. Lenders see higher credit scores as less risky, which can result in lower interest rates.

12. What are the advantages of an FHA loan for low-credit borrowers?

FHA loans offer several benefits for low-credit borrowers, including:

• Small down payment requirements: As low as 3.5% for scores 580 and above.
• Flexible underwriting criteria: Allowing non-traditional credit history and compensating factors.
• Lower closing costs: FHA loans often have lower closing costs than conventional ones.
• Lenient credit guidelines: Making it easier for those with past credit issues to qualify.

13. Are there specific FHA programs for borrowers with low credit scores?

Yes, FHA offers programs like the FHA 203(b) loan, the standard mortgage insurance program, and the FHA 203(k) loan for home improvements. Both programs are accessible to borrowers with lower credit scores, provided they meet other eligibility requirements.

14. How do FHA credit score guidelines compare to conventional loans?

FHA credit score guidelines are generally more lenient compared to conventional loans. Conventional loans usually require higher credit scores and larger down payments, making FHA loans more accessible to borrowers with lower credit scores.

15. Can I use a co-borrower to increase the possibility of getting approved for an FHA loan?

Yes, you can use a co-borrower to increase the possibility of getting approved for an FHA loan. Your co-borrower’s income, assets, and credit history will be considered, which can strengthen your loan application. Gustan Cho Associates is one of the very few mortgage lenders with no lender overlays on government and conventional loans. Borrowers who are told they do not qualify for an FHA loan but meet the minimum HUD guidelines. Please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Over 80% of our borrowers could not qualify at other lenders due to their overlays.