FHA Discussion

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Bad Credit FHA Loans

bad credit fha loans

Bad Credit FHA Loans

The Federal Housing Administration has insured FHA loans since 1934. During that time, the FHA guidelines have changed quite a bit. At one point, the minimum FHA credit score requirement was 640. Now, the FHA is insuring loans for home buyers with credit scores as low as 500.

Bad Credit FHA Loans

A bad credit FHA loan will help you to qualify for a mortgage with low credit scores and with no minimum income requirement.

What is Bad Credit?

From a lending perspective, the answer may vary depending upon the loan program. For FHA loans, bad credit is the point where some lenders opt out of approving FHA loans.

Although the FHA will insure loans for those who have credit scores as low as 500, many FHA lenders prefer not to work with borrowers who have scores that low. They will often overlay their own restrictions which is why you may find some lenders will choose not to work with you if your score is below 620.

In addition to your credit scores, FHA guidelines have restrictions on lending to individuals who have a recent bankruptcy or foreclosure. There are waiting periods of 2-3 years which may also prevent you from getting an FHA loan.

Read more about FHA credit requirements to completely familiarize yourself with the FHA guidelines around credit, collections and anything else related to credit that may impact your ability to get approved.

Below is a chart which will outline the credit score minimums and what your down payment will be.

FHA FICO Score Requirements

Benefits of a Bad Credit FHA Loan

There are some benefits to getting an FHA loan if you have bad credit versus some of the other loan programs that you may find. Here are just a few of the benefits of getting an FHA loan if you have bad credit:

  • Low income permitted
  • High Debt to Income Ratios allowed
  • Low credit scores down to a 500 FICO
  • Gift funds allowed for the down payment
  • Non-occupying co-borrowers can also cosign to help you to qualify for the loan.
  • With a down payment of at least 10%, your annual mortgage insurance premium will be lower.

You will find these benefits will far outweigh that of any other loan program. This is especially true if you have bad credit. When most lenders will not work with you, our FHA lenders will be able to help.

Bad Credit FHA Loan Requirements

These are the minimum FHA loan requirements for bad credit FHA loans.

  • Minimum FICO score requirement of 500
  • Minimum down payment requirement of 10% with a FICO score below 580
  • Minimum down payment requirement of 3.5% with a FICO score above 580
  • Mortgage Insurance Premium (MIP) is required for every FHA loan
  • Maximum debt to income ratio of over 50%
  • The home must be the primary residence
  • The borrower must have a 2-year work history with steady income

These loan requirements are extremely flexible. The ability to allow for a debt to income ratio of over 50% combined with bad credit and a low down payment is something unique to certain FHA lenders.

Bad Credit Down Payment Requirements

Although you will need 10% down if your FICO score is under 580, you can use gift funds from a relative for some or all of the down payment. The gift can also be large enough to cover FHA closing costs if needed.

Bad Credit FHA Lenders

Although the FHA publishes their guidelines, not all lenders who originate FHA loans follow them to the letter. They are permitted to overlay their own restrictions that may prevent you from getting an FHA loan with bad credit.

Although we work with a network of lenders who will help if your credit score is as low as 500, there are many lenders who only prefer to work with borrowers with higher credit scores. You may have found this to be true if you walked into your local bank only to find out that they cannot help you.

The big banks do not want your business if you have bad credit. We already know who the bad credit FHA lenders are. Click to connect with an FHA lender today.

Bad Credit Mortgage Loans Guaranteed Approval

We often hear in life that there are no guarantees. However, if you are able to meet the requirements below, your FHA mortgage approval is virtually guaranteed.

  • You meet the credit score and down payment requirements as outlined above.
  • You have been employed with consistent documented income for the past two years.
  • Your income is sufficient to qualify for the loan amount you are seeking.
  • You have not had a bankruptcy in the past two years or a foreclosure over the past 3 years.
  • The home is zoned residential, will be your primary residence and is in livable condition.

If you could meet all of these requirements above, then your bad credit FHA home loan approval is likely a reality.

First Time Home Buyers with Bad Credit

First time home buyers often have bad credit due to other credit events in their lives. As a first time home buyer, it will be extremely difficult for you to qualify for a conventional loan if you have bad credit.

Some of the other government loans such as VA or USDA are not as forgiving as FHA loans. Most lenders require a FICO score of 620 for those loan programs. Plus, you also would need to be a veteran or live in a rural area to qualify.

If you are a first time home buyer and have bad credit combined with a low down payment, a low credit score FHA loan may be the best option for you.

Bad Credit FHA Refinance

If you have bad credit, the options outlined above hold true for both a traditional FHA Refinance and an FHA streamline refinance. With an FHA streamline refinance, the process is even easier because they require less paperwork. If your credit worsened since you were approved for your original FHA loan, your recent bad credit history will not be an issue unless you have been missing payments.

Bad Credit 203k Loans

The 203k rehabilitation loan allows you to borrow the funds to purchase the home plus the amount needed to make repairs or improvements to the home. This can also be done if you have credit scores as low as 500.

Bad Credit FHA Rates

One of the traditional benefits of an FHA loan is the interest rates are typically lower than conventional loans. While this is true, if your credit scores are very low then your FHA rate will be slightly higher than if you applied with much higher credit scores.

You can still expect the interest rate for a bad credit FHA home loan to be extremely competitive. Click to find out what your rate is today.

Summary

If you have bad credit, there is likely a way for you to finance your home with an FHA home loan. Follow the steps and guidelines we outlined above and throughout the site. Let us know how we can help you. If you have questions, then give us a call. It would be best to complete the contact form first, so we can get a general idea as to what your mortgage scenario is.

Related Articles

Buying a Home With Bad Credit – Joe Boylan

Non-Traditional Home Financing Options – Paul Sian

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