Many borrowers are surprised that you can qualify for an FHA loan with credit scores down to a 500 FICO. HUD, the parent of FHA, has the most lenient credit guidelines on home loans than any other mortgage program in the nation. Borrowers with prior bad credit, outstanding collections, charged-off accounts, lower credit scores, late payments, and other derogatory credit tradelines have a better chance in getting an approve/eligible per an automated underwriting system than any other loan program.

An FHA loan is a mortgage insured by the Federal Housing Administration. This type of loan is available to borrowers with a credit score as low as 580, and can be used to finance a home purchase or refinance an existing mortgage.

FHA loans are designed to make homeownership more accessible to borrowers with bad credit. The loans are insured by the Federal Housing Administration, and this insurance protects the lender in case you default on your loan.

HUD’s mission and role is to promote homeownership to hard-working Americans who had prior bad credit but have reestablished themselves and are able to repay their new mortgage. HUD is very forgiving when it comes to borrowers with prior bad credit and lower credit scores. It is fine with having prior bad credit and lower scores to qualify for an FHA loan as long as the borrower has been timely with all of their payments in the past 12 months.

HUD Agency Guidelines On FHA Loans Under 580 FICO Score

HUD, the parent of FHA, is the federal agency that sets the agency mortgage guidelines on FHA loans. Here are the minimum HUD Agency Guidelines on FHA Loans. To qualify for a 3.5% down payment FHA Loan, HUD requires a minimum of a 580 credit score. HUD allows borrowers with under 580 credit scores and down to a 500 FICO to qualify for an FHA loan. However, per HUD Agency Guidelines, anyone under 580 credit scores needs a 10% versus a 3.5% down payment on a home purchase.

If you’re looking for a mortgage but have bad credit, you may be wondering if you can get an FHA loan. The answer is yes, you can get an FHA loan with a credit score as low as 580 – but you’ll need a 10% down payment.

Unpaid collections and charged-off accounts do not have to be paid. There is a two-year waiting period after Chapter 7 Bankruptcy to qualify for an FHA loan. There is a three-year waiting period after foreclosure, a deed in lieu of foreclosure, short sale to qualify for an FHA loan. Borrowers in the Chapter 13 bankruptcy repayment plan are eligible to qualify for an FHA loan one year into the repayment plan with trustee approval and a manual underwrite. It is very important for borrowers to understand what the basic HUD Agency Guidelines are.

Also understanding the concept between agency guidelines versus lender overlays is important. It will be worth your while to take the time in understanding how the mortgage process works. Understanding the basic mortgage process and lending requirements will help you avoid stress during the mortgage and home-buying process.

HUD Agency Guidelines Versus Lender Overlays

Why do lenders have different mortgage lending requirements on FHA loans? Many borrowers often get confused why a local bank may require a 640 credit score and another lender may require a 620 credit score. All lenders need to make sure their borrowers meet the basic minimum lending guidelines of HUD. HUD is the parent of FHA. HUD sets the minimum lending requirements on FHA loans.

Lenders need to make sure their borrowers meet the minimum HUD Agency Mortgage Guidelines in order for the FHA loans they originate and the fund is insurable by HUD. In the event a borrower does not meet one of many HUD Agency Guidelines, then the lender is not insured on the borrower that defaulted and/or foreclosed on their FHA loan.

However, most lenders have higher lending requirements that is above and beyond the minimum HUD Agency Guidelines which are called lender overlays. Lender overlays are additional lending requirements that is above and beyond the minimum agency mortgage guidelines by HUD on FHA loans. For example, the minimum credit score required to qualify for an FHA loan is 500 FICO.

However, not too many lenders do not offer FHA loans for those under 580 credit scores. This is called lender overlays on credit scores. Even though a borrower has a 500 credit score with an approve/eligible per automated underwriting system findings, most lenders will not accept them. This is totally legal and allowed by lenders.

Common Lender Overlays By Mortgage Companies

Lenders can require higher lending requirements from borrowers that surpass the minimum HUD Agency Mortgage Guidelines. Again, this is called lender overlays. Lenders can have lender overlays on just about anything and everything. One lender may have a stricter lender overlay than another lender.

Just because a borrower cannot qualify at one mortgage company for an FHA loan does not mean they cannot qualify with a different lender. Over 75% of our borrowers at Capital Lending Network, Inc. are folks who could not qualify at other lenders do to their lender overlays. Capital Lending Network, Inc. has no lender overlays on FHA, VA, USDA, and Conventional Loans.

Lender Overlays On FHA Loans Under 580 FICO Score

Lender overlays imposed by lenders, the minimum credit score requirement to qualify for a 3.5% down payment home purchase FHA loan is a 580 credit score. However, most lenders will require a 620 or higher credit score as part of their lender overlays.

HUD allows borrowers with under 580 FICO and down to a 500 credit score to qualify for FHA loans. However, any borrower with under 580 credit score requires a 10% versus a 3.5% down payment. Many lenders will not offer any FHA loans with under a 580 credit score. Again, this is an overlay where borrowers will qualify with under a 580 credit score but the lender does not want to do the loan due to their lender overlays.

The maximum front-end debt-to-income ratio is 46.9% front end and the back end is 56.9% DTI to get an approve/eligible per automated underwriting system (AUS). However, many lenders will have lender overlays on debt to income ratio where they may cap the front end at 31% and the back end at 43% DTI. Outstanding collections and charged-off accounts do not have to be paid to qualify for an FHA loan.

Again, many lenders will require borrowers to pay outstanding collections and/or charged-off accounts as part of their lender overlays. This is exactly the reason why borrowers should educate themselves prior to starting the homebuying and mortgage process. By having knowledge of the general basic HUD agency guidelines, you will know if a loan officer tells you that you do not qualify with them, it is not because you do not qualify for an FHA loan but rather you do not qualify with that particular lender.

Most loan officers will not go into detail with you about lender overlays. They will just tell you that you do not qualify for an FHA loan. However, if you know about HUD Agency Guidelines, you know that you can qualify at different mortgage companies with no lender overlays like Capital Lending Network, Inc.

Pre-Approval Mortgage Process for FHA Loan

Capital Lending Network, Inc. has zero lender overlays on FHA, VA, USDA, and Conventional Loans. The team at Capital Lending Network, Inc. has a national reputation of being a one-stop mortgage shop. Besides having no lender overlays on government and conventional loans, we offer dozens of non-QM and alternative financing loan programs such as bank statement mortgages, mortgages one day out of bankruptcy, asset-depletion loans, condotel/non-warrantable financing, and P and L no doc stated income loans. If the loan program exists, Capital Lending Network has it.

To start the qualification and pre-approval mortgage process, please contact us at Capital Lending Network, Inc. at 888-900-1020 or text us for a faster response. Or email us at contact@capitallendingnetwork.com. The team at Capital Lending Network, Inc. is available 7 days a week, evenings, weekends, and holidays.