Credit Scores and Maximum FHA financing
If the borrower’s minimum decision credit score is… | Then the borrower is… |
At or above 580 | Eligible for maximum financing. |
Between 500 and 579 | Limited to a maximum LTV of 90% |
Less than 500 | Not eligible for FHA-insured financing. |
Minimum decision credit score is determined for each borrower according to the following rule: when three scores are available, the middle score is used; when only two are available, the lesser of the two is chosen; when only one is available that score is used.
Keep in mind that the majority of lenders have implemented stricter credit score requirements. Currently most lenders require a 640 middle score, while a few will go slightly lower.
Lack of Established Credit History
The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting a loan application.
Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from
- utility payment records
- rental payments (12 months cancelled checks or a verification of rent from a management company)
- automobile insurance payments, and
- other means of direct access from the credit provider
Collections and Judgments
FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.
Exception: an exception to the payoff of a court-ordered judgment may be made if the borrower has
- an agreement with the creditor to make regular and timely payments, and
- provided documentation indicating that payments have been made according to the agreement
Past FHA Foreclosure
A borrower that has defaulted on an FHA insured loan must wait three years before regaining eligibility for another FHA insured mortgage. The three year waiting period begins when FHA pays the initial claim to the lender. This includes deed-in-lieu of foreclosure, as well as judicial and other forms of foreclosures.
Past Foreclosure (other than FHA)
A borrower is generally not eligible for a new FHA insured mortgage if, during the previous three years
- his/her previous principal residence or other real property was foreclosed, or
- he/she gave a deed-in-lieu of foreclosure
Exception: The lender may grant an exception to the three year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wager earner, and the borrower has re-established good credit since the foreclosure.
Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower’s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed.
Bankruptcy
A Chapter 7 bankruptcy does not disqualify a borrower from obtaining an FHA insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have
- re-established good credit, or
- chosen not to incur new credit obligations.
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA insured mortgage, provided that the lender documents that
- one year of the pay-out period under the bankruptcy has elapsed
- the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
- the borrower has received written permission from the bankruptcy court to enter into the mortgage transaction.
Consumer Credit Counseling
Participating in a consumer credit counseling program does not disqualify a borrower from obtaining an FHA insured mortgage, provided the lender documents that
- one year of the pay-out period has elapsed under the plan
- the borrower’s payment performance has been satisfactory and all required payments have been made on time, and
- the borrower has received written permission from the counseling agency to enter into the mortgage transaction.
Short Sales
A borrower is not eligible for a new FHA insured mortgage if he/she pursued a short sale agreement on his/her principal residence simply to
- take advantage of declining market conditions, and
- purchase a similar or superior property within a reasonable commuting distance at a reduced price as compared to current market value.
Borrower Current at the time of Short Sale
A borrower is considered eligible for a new FHA insured mortgage if, from the date of loan application for the new mortgage, all
- mortgage payment on the prior mortgage were made within the month due for the 12-month period preceding the short sale, and
- installment debt payments for the same time period were also made within the month due.
Borrower in Default at the time of Short Sale
A borrower in default on his/her mortgage at the time of the short sale (or pre-foreclosure sale) is not eligible for a new FHA insured mortgage for three years from the date of the pre-foreclosure sale.