Credit Requirements for an FHA Loan in 2022

Peter Bieda The Mortgage Expert
November 13, 2021 - 3 min read

We will be covering the HUD Guidelines On Credit Scores On FHA Loans. FHA Loans remain the most popular home mortgage program in the nation due to its lax guidelines on credit and down payment. Homebuyers with credit scores down to 500 FICO can become eligible for an FHA loan with an approve/eligible per automated underwriting system (AUS). However, any borrower with a credit score under 580 FICO needs to put a 10% down payment on a home purchase per HUD Guidelines.

FHA Loans Explained

HUD stands for Housing and Urban Development. HUD is the parent of FHA. FHA is not a lender and does not originate nor fund FHA loans. FHA loans are originated, processed, underwritten, and serviced by private mortgage companies. The role of FHA is to insure FHA loans are funded by private lenders in the event the borrower defaults on their FHA loans.

In order for FHA to insure and partially guarantee lenders in the event the borrower defaults on the FHA loans, the lender needs to follow strict HUD Guidelines on FHA loans. In the event, if the lender did not abide by all HUD Guidelines, FHA will not insure the FHA loans funded by the private lender in the event of default and/or foreclosure.

Credit Requirements for an FHA Loan

If you’re looking to purchase a home, you may be considering a loan from the Federal Housing Administration (FHA). Before you apply for an FHA loan, though, it’s important to understand the credit requirements. Here’s what you should know about qualifying for an FHA loan.

The minimum credit score for an FHA loan is 580. However, if your score is between 500 and 579, you may still be eligible for an FHA loan, but you’ll need a 10% down payment. In addition to your credit score, your debt-to-income ratio (DTI) is also a key factor in determining whether or not you can qualify for an FHA loan. Your DTI is calculated by dividing your monthly debts by your monthly income.

For example, if you have $500 in monthly debts and a gross monthly income of $3,000, your DTI would be 17%. In general, to qualify for an FHA loan, your DTI should be no more than 43%. However, if you have a credit score of 580 or higher, you may be able to get approved with a DTI of up to 50%. When it comes to down payments, the minimum amount you’ll need for an FHA loan is 3.5% of the purchase price of the home.

If you’re applying for an FHA 203(k) loan (a mortgage that allows you to purchase and renovate a home with one loan), the minimum down payment is 3.5% of the home’s “after-improved value.” If you’re not sure whether or not you meet the credit requirements for an FHA loan, it’s a good idea to talk to a lender. They can help you understand your options and what you need to do to qualify.

Understanding The Difference Between HUD Guidelines Versus Lender Overlays

All lenders need to have their borrowers meet the minimum HUD Agency Mortgage Guidelines in order for HUD to insure and/or partially guarantee borrowers who default on their FHA loans. However, lenders can have additional higher lending requirements that are above and beyond the minimum HUD Guidelines which are called lender overlays.

Most lenders will have lender overlays on FHA loans. However, there are lenders like Capital Lending Network that have no lender overlays on FHA loans. CLN will just go off the automated underwriting system findings (AUS) and has no other lender overlays. As long as the borrower can get an approve/eligible per AUS, CLN will approve, process, underwrite, and fund the loan. CLN has no additional lender overlays.

HUD Guidelines On Credit Scores: Minimum HUD Agency Guidelines On FHA Loans

Borrowers with credit scores down to 500 FICO can qualify for an FHA loan. However, borrowers with credit scores under 580 FICO require a 10% down payment per HUD Guidelines. Borrowers can qualify for an FHA loan with credit scores down to 500 FICO. Borrowers with at least a 580 credit score or higher can qualify for an FHA loan with a 3.5% down payment. Outstanding collections and charged-off accounts do not have to be paid.

There is a two-year waiting period after the Chapter 7 Bankruptcy discharge date. There is a three-year waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify for an FHA loan. Borrowers in Chapter 13 repayment can qualify for an FHA loan after making twelve timely payments and trustee approval. There is in mandatory waiting period after the Chapter 13 discharge date.

Capital Lending Network, Inc. are experts in manual underwriting. VA and FHA Loans are the only two loan programs that allow manual underwriting.