FHA Credit Requirements

FHA credit requirements focus on an applicant's recent good use of credit rather than excellent FICO scores overall.

Slideshow:FHA Loan Guidelines

The approval decision for your FHA mortgage is made by an employee of your lender who is trained in the FHA loan requirements. This employee, the FHA underwriter, knows the qualifications for an FHA-insured loan including the credit requirements. If the employee approves the loan under the FHA guidelines, the lender has a guarantee that the loan will be repaid by the federal government if the applicant defaults on the loan.

In general, the credit requirements for an FHA-insured mortgage are not as stringent as the requirements for loans which are not FHA loans. The goal of the underwriter is to review the applicant's overall credit history, looking for a record of good credit management. Most underwriters will concentrate on the credit history of the last two years, disregarding any prior history.

Most underwriters will be looking for any big indicators of credit problems such as accounts going into collections or legal judgments against the applicant. With an FHA loan, the underwriter will not automatically deny the loan if there is a history of credit problems. They will look to see if there is any written explanation from the applicant explaining the situation that caused the credit problems. Frequently this explanation may be enough to convince the underwriter that the past credit problems were due to circumstances at the time and that they don't reflect any poor financial management by the applicant.

No specific FICO score is required by FHA for an applicant to be considered for an FHA loan. Starting in 2008 FHA applicants with credit scores below 500 are required to put down at least 10% of the value of the home as a down payment. Applicants with higher credit scores can apply for a loan with a lower down payment.

The lender arranging the FHA loan may have a minimum FICO score requirement. For example, many lenders are looking for scores of 620 or greater and they might reject any loans from applicants with scores below the 620 point. This threshold number will rise and fall as the credit market changes. For example, a lender may require a higher FICO score when credit is tight.

Borrowers without a credit history may still be approved for an FHA mortgage if the underwriter can see a pattern of regular payments to obligations. For example, a history of making regular rental payments, car insurance payments and utility payments can be considered a good "non-traditional" credit history.

The underwriter may ignore any current accounts in collection if the applicant's credit history is good and if the amount owed in the accounts is not significant or the applicant will have to agree to pay the collections prior to closing. The mortgage may also be approved if the applicant has any court-ordered judgments; however, the judgments may have to paid off before the mortgage is funded.

If the applicant has foreclosed on their mortgage within the past three years, they will usually be denied for an FHA mortgage. However, the applicant may be considered for FHA approval if the applicant:

• Can prove that the foreclosure was due to circumstances beyond the applicant's control
• Has established and maintained a good credit history since the foreclosure

Applicants with recent bankruptcies may be eligible for FHA mortgages. Specifically:

• Chapter 7 – Applicants may be eligible if the bankruptcy was discharged at least two years before and the applicant has shown good credit practices since the bankruptcy.
• Chapter 13 – Applicants may qualify after completing one year of the pay-out period if they receive court approval to take on the mortgage obligation. The applicant must also show good credit practices during the pay-out period.

An applicant with good credit can still be denied approval for an FHA mortgage if they have outstanding debts to the federal government. Specifically, an FHA loan will not be made to an applicant who:

• Has been suspended or excluded from any other FHA programs
• Has delinquent federal debts such as:
  • Small Business Administration loans
  • Federal taxes
  • Federal student loans
  • Veteran's Administration-guaranteed mortgages

Once the outstanding debt is paid, the applicant can reapply for the FHA mortgage.

FHA credit requirements can make home ownership possible for many people who may have been denied a mortgage based on their FICO scores or lack of credit history. Talk to your lender to see if you qualify for an FHA-insured mortgage.

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