FHA Credit Guidelines
The FHA loan underwriters focus primarily on the quality of credit
over the last 12 months. They are not overly concerned about minor
late payments which happened 18, 24 or 36 months ago. However, all
collections, excluding medical, must be paid in full prior to closing
(preferably prior to application) or have a documented payment plan.
They do
require letters of explanation for all late payments. Underwriters are more concerned about whether the loan makes sense and
that you have addressed and corrected whatever issues created the past credit problems.
FHA credit guidelines can seem complicated as far as documentation but
the credit guidelines or credit qualification requirements are actually
slack compared to a Conventional loan.
FHA Credit Score:
Most loans on the market today are credit score driven with the exception of FHA
which is one of the best loan programs on the market for people with minor issues that
have lowered their scores.
Since you are here and if you are interested in understanding scores,
this is the break down:
- A score of 680 and above will get you into a conventional conforming loan with the lowest rates available (Fannie Mae and Freddie Mac). These rates are 1% above the 10 year T-Bill.
- In the non-conforming market credit scores will determine your interest rate. You may be in this market for many reasons, not just score. It could be
because your loan amount exceeds conventional guidelines (jumbo), the house does not qualify, no down payment, high debt ratios, credit history issues, or you could be self employed and don't show enough income to qualify.
- Credit scores above 660 will get you the best rates in this market which is 1 to 2 points higher than the conforming market, depending on the type of loan you are getting.
- Scores from 580 to 620 could put you as much as 3 to 4 points higher in rate, and you can still qualify for a zero down program.
Mortgage and Rent payments:
This has to be your number one priority. If you have been more than 30 days late on your rent or mortgage
payment in the last 12 months you will not qualify for a Fannie Mae, Freddie Mac,
FHA, or VA loan. There are sometimes exceptions, ... if you have a very high score, lots of assets, and a
legitimate documented excuse, you may get a waiver.
Car payment and installment loans:
Your history should reflect no 60 day late payments and no more than one 30 day late to get a conforming loan. The non-conforming loans allow these and again the rate depends on how many late payments you have had.
Again, FHA credit requirements prefer no lates in the last 12 months.
Revolving accounts (credit cards):
You should not have any payments 60 days late and no more than two
payments 30 days late in the last two years for a conforming loan.
FHA allows it with a good explanation as long as they did not occur in the
last 12 months.
Collections, Judgments, and Liens:
Fannie Mae, Freddie Mac, FHA and VA require that all be paid in full and they prefer that they be at least two years old.
FHA will sometimes make an exception on the length of time or if they are on a current payment plan in which case all other things must be good.
Bankruptcy:
Fannie Mae and Freddie require 4 years from discharge date. FHA only requires 2
years after a chapter 7,
a good excuse, and re-established credit. Actually, you can qualify for an FHA loan if you are still in chapter 13 (for at least a year)
and have been paying on time through the courts. You
must also get court approval which does happen often!
Non conforming lender requirements vary quite a bit. As a general rule they do want to see reestablished credit unless you are putting 20% down. There are some lenders that will lend with one day out of discharge. Your credit score is very important on these programs. Again, you need a broker to sort out the details for you. Guess what, that's free, and no obligation. They will look at your entire portfolio and if they can't get you in something now, they will counsel you on the steps you need to take to get in a loan later. Be sure you seek out a broker that has ALL the products on the market including FHA.
Foreclosure:
Generally, a foreclosure of your primary residence must be at least three years old and have been caused by circumstances out of your
control, such as: death of the primary wage earner, layoff, or long term serious illness. Non-conforming lenders do vary but will normally require a substantial down payment if it is less than 3 years old.
Repossessions:
The guidelines on this are about the same as a foreclosure except that it cannot have a deficiency balance for a conforming
or FHA loan. The non-conforming market doesn't care about the balance if it is more than three years old and again, their guidelines vary from one lender to another.
Student Loans:
Defaulted student loans will haunt you for the rest of your life. Unless they are re-affirmed or paid off you will never get a conforming,
FHA, or VA loan. However, the non-conforming market generally does not care about them at all except in extreme cases to the tune of $50k or more.
Previous Marriage:
Be careful here. The conforming market could care less about your divorce agreement with respect to your debt. If you signed, you are still accountable. FHA will sometimes make a wavier if you can show the divorce decree that states it is the other parties responsibility and all other things are good.
(These debts will also affect your debt to income unless you can prove the other party is paying with 12 months cancelled checks.) The non-conforming lenders will normally
accept the divorce decree.
Credit Depth:
Generally this term refers to how many trade lines you have, how long you have had them and their amounts. Most lenders want to see at least a two-year history and at least 4 trade lines. Some require one of those trade lines to have had a balance over a certain dollar amount ($5,000). In the non-conforming market these requirements vary between lenders.
You can see how poor credit will cost you a lot of money in higher interest. It is important to take care of your credit and monitor
it often, as it sometimes contains errors.
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