FHA Credit Requirements Per HUD Guidelines For AUS Approval

 

In this blog, we will discuss and cover the minimum FHA credit requirements per HUD guidelines to get approve/eligible per the automated underwriting system (AUS). FHA loans are the most popular mortgage loan option for first-time homebuyers with little to no credit tradelines, borrowers with low credit scores, high debt-to-income ratios, and borrowers with bad credit.

You do not have to pay outstanding collection and charge-off accounts to qualify for an FHA loan. However, you need timely payments in the past 12 months to get an approve/eligible per automated underwriting system.

We will also cover the FHA credit requirements per HUD guidelines for FHA approval on manual underwriting. One of the key tricks most loan officers do not know is that there is a way of getting an AUS approval on FHA loans with late payments in the past 12 months. In the following sections, we will cover FHA credit requirements per HUD guidelines for AUS approval.

Advice and Tips on Getting an Approve/Eligible per Automated Underwriting System

We will let you know our secrets on meeting FHA credit requirements per HUD guidelines and getting an AUS approval with recent late payments in the past 12 months. Outstanding collections, charge-off accounts, and late payments are fine to get approval on FHA loans.

You cannot have late payments in the past 12 months to get an approve/eligible per automated underwriting system on a 3.5% down payment home purchase FHA loan.

You can get an automated underwriting system approval on FHA loans with late payments in the past 12 months if you put a 10% to 20% down payment on a home purchase on FHA loans. We will also discuss the FHA credit requirements per HUD guidelines for mortgage borrowers for FHA mortgage approval.

FHA Credit Requirements For Bad Credit and Low Down Payment

HUD is the parent federal agency of FHA. FHA is not a lender. The role of the Federal Housing Administration (FHA) is to insure and partially guarantee FHA loans originated by private lenders against borrowers’ default. FHA will partially guarantee lenders from losses sustained due to foreclosures of FHA loans.

The Benefit of FHA Loans Versus Other Mortgage Options

HUD created and launched FHA to promote homeownership for first-time home buyers and borrowers with less-than-perfect credit.

Homebuyers can qualify for FHA loans with lenient FHA Credit Requirements and low down payment. Borrowers with at least 580 credit scores can qualify for FHA loans with a 3.5% down payment. Borrowers under 580 FICO can qualify for FHA loans with a 10% down payment.

The minimum FHA Credit Requirement to qualify for FHA Mortgages is 500 FICO. This blog will discuss FHA Credit Requirements for borrowers with recent late payments in the past 12 months.

What Is The Minimum FHA Credit Requirements To Get Automated Approval

Only HUD Approved Lenders can originate and fund FHA loans. HUD-approved lenders are private lenders approved by HUD to originate and fund FHA loans.

For HUD to insure all FHA mortgage lenders originate and fund, the lender needs to follow HUD 4000.1 FHA Handbook Guidelines. The FHA loan is not insured if the lender misses following HUD Guidelines. HUD will not cover any losses the lender takes when the borrower forecloses.

Lenders cannot sell the FHA loan they originate and fund on the secondary market if they do not meet all HUD Mortgage Guidelines.

FHA Loans With Bad Credit: The Importance Of Timely Payments

Before approving a loan, the mortgage lender reviews and analyzes the integrity of the borrower’s past credit performance in great detail. Based on HUD requirements, borrowers with timely payment history who have demonstrated a solid track record of timely payments will likely be eligible for a loan. Potential borrowers with a track record of making their monthly payments slowly, poor financial judgment, and delinquent accounts are not good candidates for loan approval.

FHA Credit Requirements on Non-Traditional Credit Tradelines

Borrowers do not have to have traditional credit tradelines that report on consumer credit reports to qualify for FHA loans. There are many instances where borrowers do not have a credit score.

Borrowers with no credit scores and traditional credit tradelines can qualify for FHA loans via manual underwriting and non-traditional credit tradelines.

Non-traditional credit tradelines are creditors such as utilities, cell phone carriers, insurance, and other creditors that do not report on credit bureaus. 12 months of on-time payments are required. Borrowers are required to provide lenders with 12 months of canceled checks.

HUD Guidelines After Chapter 7 Bankruptcy

Borrowers can qualify for FHA loans two years after the Chapter 7 Bankruptcy discharge date. A prior bankruptcy on a credit report will not penalize borrowers with loan pricing level adjustments (LLPA) which mean a higher rate on mortgage rates.

Many borrowers think that prior bankruptcy will affect them in getting a higher interest rate. This is not true. Credit scores determine mortgage rates. The higher the credit scores, the lower the mortgage interest rates.

To maximize credit scores, consumers should get 3 to 5 secured credit cards with at least a $500 credit limit as soon as they get their Chapter 7 Bankruptcy discharged. Secured credit cards are the easiest and fastest way of boosting credit scores and re-establishing credit.

HUD Guidelines During And After Chapter 13 Bankruptcy

Borrowers in a current Chapter 13 Bankruptcy Repayment Plan can qualify for FHA loans via manual underwriting and Trustee Approval. They need to be in the repayment plan for at least one year. 12 months of timely payments via canceled checks must be provided to the lender. Alex Carlucci is a Senior Vice President of Gustan Cho Associates. Alex Carlucci is an expert in helping borrowers during and after Chapter 13 Bankruptcy to secure FHA and VA loans.

HUD, the parent of FHA, will permit approving a borrower who is still paying on a Chapter 13 Bankruptcy. However, the payments must have been satisfactorily made and verified for one year. The Bankruptcy court trustee’s written approval is required. Most Trustees will approve a home mortgage. The Trustee approval is required to proceed with the loan.

The borrower will have to give a full letter explaining the bankruptcy with the loan application. Borrowers must also have re-established good credit, qualify financially and have good job stability. There are no waiting period requirements after the Chapter 13 Bankruptcy discharge date. Any Chapter 13 Bankruptcy that has not been discharged for at least 24 months needs to be manually underwritten. No late payments after the Chapter 13 Bankruptcy discharge date.

FHA Credit Requirements After a Housing Event

Borrowers with a prior housing event, such as a foreclosure, deed in lieu of foreclosure, or a short sale, can qualify for FHA loans after meeting the three-year waiting period. The waiting period start date is when the name of the homeowners was transferred out of their names into the name of the new owner or the date of the sheriff’s sale.

The key to getting an approve/eligible after foreclosure, deed in lieu of foreclosure, or short-sale is to have re-established credit with no late payments after the housing event. Borrowers do not have to pay outstanding collections and charge off accounts to qualify for FHA loans. However, to get an approve/eligible per the automated underwriting system (AUS), timely payments in the past 12 months are required.

 

Evaluating Credit History

Payment History:

• Consistent on-time payments are crucial. Lenders will examine your payment history over the past 12 months to determine if you have made timely payments on all your obligations.

Delinquent Federal Debts:

• Borrowers must not have any delinquent federal debts or judgments, as these can disqualify them from obtaining an FHA loan.

Importance of On-Time Payments

Last 12 Months:

• Lenders emphasize the borrower’s payment history over the past 12 months. Multiple late payments or recent delinquencies can negatively impact the chances of loan approval.

Compensating Factors

• Large Down Payment: A higher down payment can offset a lower credit score or other credit issues.
• Cash Reserves: Having significant cash reserves can improve your chances of loan approval.
• Stable Employment History: A stable and consistent employment history is a strong compensating factor.

Frequently Asked Questions (FAQs)

1. What is AUS approval?
AUS stands for Automated Underwriting System. It is a computer-generated loan underwriting decision that evaluates a borrower’s credit risk and determines if they meet the lender’s criteria for a mortgage.
2. What credit score is required for FHA loans?
According to HUD guidelines, the minimum credit score for FHA loans is 500. However, to qualify for the low 3.5% down payment option, you need a minimum credit rating 580. Borrowers with a credit rating between 500 and 579 are needed to make a 10% down payment.
3. Can I get an FHA loan with no credit score?
Yes, getting an FHA loan without a credit score is possible. HUD guidelines allow lenders to assess creditworthiness by considering non-traditional credit sources, such as rental history, utility payments, and other financial obligations.
4. How does the AUS evaluate my credit for FHA loans?
The AUS evaluates your credit history, including your credit score, payment history, outstanding debts, and other financial factors. It uses this information to generate an automated underwriting decision, indicating whether you meet the credit requirements for an FHA loan.
5. Are there specific credit history requirements for FHA loans?
Yes, HUD guidelines specify certain credit history requirements. For example, borrowers must not have any delinquent federal debts or judgments. Additionally, they should have a clean record of on-time payments for at least the past 12 months.
6. What if I have a bankruptcy or foreclosure on my credit report?
You can still be eligible with a history of bankruptcy or foreclosure, but there are waiting periods. Usually, you must wait two years after a Chapter 7 bankruptcy discharge and three years after a foreclosure. You must have re-established good credit and demonstrated financial stability during this time.
7. Do late payments affect FHA loan approval?
Yes, late payments can affect your FHA loan approval. Consistent on-time payments in the last 12 months are crucial. Multiple late payments or recent delinquent accounts may result in a denial or require manual underwriting.
8. What is manual underwriting, and when is it used?
Manual underwriting is used when a loan application does not receive automated approval through the AUS. A human underwriter reviews the application, considering additional factors such as compensating factors (e.g., significant cash reserves, high income) to make a decision.
9. Are there exceptions to the credit requirements for FHA loans?
Exceptions can be made, especially if you have strong compensating factors. For example, a large down payment, a stable job history, or significant savings can offset a lower credit score or other credit issues.
10. How can I enhance my possibility of getting AUS approval for an FHA loan?
To improve your chances, maintain a good credit score, make on-time payments, reduce debt, and avoid new credit inquiries. Providing complete and accurate information on your loan application is also essential.

For more information about the contents of this blog or other topics or to qualify for an FHA loan, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.