My Favorite FHA Source Allows Below a 580 Credit Score

If you are worried about low credit scores and you are thinking about purchasing a home FHA, you have come to the right place.

Preston Ware
Mortgage Broker
561 329 0075
NMLS # 216170

20 Years experience in Florida

I am constantly being asked what is my minimum credit score. 

That is a loaded question but normally I can entertain FHA financing for borrowers with a middle credit score as low as 580. 
I have been told, we can do a manual underwrite as low as 550 but I have yet to see that happen.

If you are borderline, we should probably talk about your credit a little bit. There are many simple ways of boasting scores. Sometimes it can be something as simple as paying down some credit cards. If you have low scores due to lack of credit, I can steer you to some places that will help you establish credit.

Quite often credit scores can be low due to student loans that are in deferment. The bureau reads the balance at or above the high limit so the account has the impact sort of like a credit card that is maxed out. Unfortunately there is nothing we can do about this. FHA will also count 1% of the balance against you regardless if you are in deferment or have a negotiated plan.

Before we all get too excited, I should say there are a lot of caveats when we are working with FHA loans and credit scores lower than 620. The acceptable middle score for most banks and FHA is 640.

Here are the two main reasons why loans get a little tricky with scores below 620.

Total debt ratio and how old bad debts .

Debt Ratios -
One huge advantage of using the FHA program is that it allows for a maximum debt ratio of 55%. That is your total housing payment and total debts divided by your gross income. FHA goes up to 55%. Freddie Mac /Fannie Mae will go to 49%, sometimes less. With FHA, when credit scores are below 620, they follow the strict rules of being a "qualified mortgage" and curtail the maximum debt ratio at 43%. So anyone with low scores can go purchase more house when they get their middle score over that 620 threshold.

Treating Old Bad Debts - Another way that the guidelines become more conservative is that old bad debts are treated differently. FHA typically does not penalize the borrower for old bad debts such as a credit card charge off. Actually they are quite forgiving except for stuff like repos and foreclosures.

But when scores are below 620 we have to carry a payment for old bad debts. Almost like the account is open. This is another way that the debt ratio gets bigger when it needs to be under 43%.

The acceptable middle score for most banks and FHA is 640.

Many will tell you they cannot help you because they have no leeway below that credit score threshold. I have leeway down to a 580 or less but these  criteria have to be met in order for us to get our Approve/Eligible.

If you have spent anytime over at my Establishing Credit page you will see that most lenders want to see three valid tradelines paid on time for one year or more. These tradelines can be credit cards, car loans, student loans, cell phone bills if it appears on the credit.  In addition to this the underwriter would like to see your housing payment paid on time. This is very important! This can be demonstrated with cancelled checks or if you live within a big community, a verification of rent from a management company.

Other factors that can come into play are previous short sales, foreclosures or bankruptcies. FHA will make you wait 3 years from your short sale date before you are allowed for homeownership again. If you had a foreclosesure you must wait 7 years from the foreclosure date. If you have had a bankruptcy you must wait 4 years from the discharge date and you will need to show re-established credit that is spotless since the BK..

When in doubt we will need to run your file on-line through Automated Underwriting which will give us a feedback of Approve/Eligible , Refer with Caution or Refer. In other words Yes , No or Maybe.

Even if you have a 550 middle score I would love to hear from you. Please keep in mind that the most important thing is your job. If you have the job, the credit and the savings will follow. Sometimes boasting a credit score can be as simple as paying down certain credit cards to 40% of high credit limit.