The Federal Housing Administration (also known as FHA) requires only a minimum credit score of 500, while also allowing borrowers a down payment as low as 3.5%. FHA loans will also allow a zero-credit score by supplementing with non-traditional credit. With the options offered by FHA, this is a common loan program often utilized by first-time home buyers.
What are the credit requirements for an FHA loan?
- For credit scores between 500 – 580, 10% of the purchase price is required as a down payment
- For credit scores of 580 and above, 3.5% of the purchase price is required as a down payment
- Charge-Offs and Collections
- Any collection account or accounts totaling $1,000 or greater that have been disputed, will result in the file being automatically downgraded to a refer finding instead of an automatic accept
- Any collection account or accounts totaling $2,000 or greater that are non-medical, will need to be paid off at or before closing, or 5% of the cumulative amount of collections will be used as a minimum payment towards your debt to income ratio
- FHA bankruptcy & foreclosure waiting periods
- Chapter 7 Bankruptcy has a 2-year waiting period after the discharge date, unless there is an extenuating circumstance that was out of the borrower’s control
- Chapter 13 Bankruptcy has a 12-month waiting period, after 12 months of trustee payments have been made on time with court approval
- There are further rules for dismissed & double bankruptcies, please contact your mortgage professional for further information
- If your home was foreclosed upon, then you will have a waiting period of 3 years from application date before you can try to qualify for an FHA loan
Does FHA allow for zero credit scores? What is non-traditional credit?
- FHA will allow a loan to be obtained with a zero-credit score with limited debt to income factors from a qualifying credit score. You must also have compensating factors, such as reserves (1-3 months of your future monthly mortgage payment showing available in your assets) and/or 2-3 non-traditional credit tradelines.
- Non-traditional credit is any type of bill that is paid monthly, but is not actively reporting on your credit report. These would include rent, cell phones, or auto insurance, along with others. These can be used to prove that there have been payments made on time for at least 12 months, and can be used to obtain financing with a zero-credit score.
Does FHA allow for higher debt to income ratios, & what is used to calculate my debt to income?
- Debt to Income, also known as DTI, is a calculation of gross monthly pay divided by outgoing debts. This results in a front and back end ratio that is used to qualify for certain loan programs. Overtime, bonuses or other types of pay may be used if there is a 2-year average that shows consistency.
- FHA’s maximum qualifying DTI ratios are 31% for the housing payment, and 43% for of the total obligated monthly debt payments. There are exceptions that can be made and granted for the allowable debt to income as high as 56.99%.
- The debts & liabilities that are used for the DTI calculation will be the minimum payment due on any credit card, auto loan, installment loan, or retained real estate. FHA requires 1% of the balance on any student loan that is on an IBR, forgiveness, or specialty repayment plan. Any 401k loan repayments, child support, or alimony will also be used in the calculations of qualifying DTI.
Do FHA loans have private mortgage insurance?
- All FHA loans have private mortgage insurance, also known as PMI, no matter how much money is put down. There is also an upfront funding fee in the amount of 1.75% of the loan amount. This fee is built into the loan itself and does not need to be paid out of pocket.
- With 10% down or less than a 30-year mortgage, the monthly mortgage insurance stays on for the life of the loan.
- With more than 10% down, the mortgage insurance is removed after 11 years on a 30-year or 15-year mortgage.
Understanding the FHA Loan and all requirements can be overwhelming. Best suggestion is to contact a professional and trusted mortgage company to obtain more in-depth details. USA Mortgage is a full-service mortgage banker and always here to help with any home loan needs.