Frequently Asked Questions About Low Credit FHA Loans

August 1, 2014

Keeping a perfect credit score isn’t easy. Sometimes life throws us a curveball, sometimes we make a bad financial decision, or sometimes we fall victim to another person’s financial abuse such as identity theft. Whatever your reasons for having less-than-perfect credit, know that you’re not alone. And just because you have a mid to low credit score doesn’t necessarily mean you won’t be able to qualify for home financing.

Since so many Americans are faced with credit woes, the government made it easier for people with not-so-stellar credit ratings to obtain home financing through the FHA. The FHA insures mortgages that are provided by approved lenders, allowing them to offer the loans at a lower level of risk. With a lower risk level, lenders may be able to be slightly more lenient when it comes to credit scores and interest rates, making the FHA loan a very popular option for buyers with less than perfect credit.

Want to know more? Here are a few frequently asked questions about FHA loans for low credit borrowers:

What is the lowest score I can have to still qualify for an FHA loan?

The minimum credit score requirements can vary depending on the type of FHA loan the applicant is interested in. In general, to get the maximum level of financing on a typical home purchase, borrowers should have a score of 580 or higher. The FHA guidelines says those with scores between 500 and 579 are limited to 90 percent LTV. In other words, the lower your credit score, the less you can finance. Keep in mind that different lenders may have their own credit guidelines as well, so the best thing to do is talk with a mortgage professional to get the specific requirements.

Can I get an FHA loan without a credit history?

While the FHA prefers to see a traditional credit history, it is possible to get an FHA loan without it. You can do this by using what is known as “non-traditional credit references.” These are references you can use to help build your case as a responsible, bill-paying adult that are not tied to actual lines of credit. Letters from a landlord, utility company, phone service provider or school tuition representative are a few examples. Again, talk to a mortgage lender for more details and other loan requirements.

Am I eligible for an FHA loan if I filed bankruptcy?

For a Chapter 7 bankruptcy filing, the FHA usually wants to see at least two years pass between the date of bankruptcy discharge and the date of the mortgage application. Note that it’s two years from the discharge to the application – not the closing.

There are a few exceptions to the rule. Borrowers who had a one-time life event which directly led to the bankruptcy and can show their credit has since been reestablished can request their lender to make an exception.

For Chapter 13 bankruptcy filing, the FHA wants to see that the mortgage applicant has made payments to creditors on time for a period of at least one year. They may also want written approval of a court-appointed trustee.

What if I had a foreclosure?

Yes, you can still get an FHA loan if you’ve had a foreclosure. However, the FHA has a three year lockout period for homeowners who have been foreclosed upon or who have received a deed-in-lieu of foreclosure.

Like with the bankruptcy guidelines, the FHA may allow exceptions in certain circumstances. Talk to your lender for more information.

Where can I go for more information?

The best place to start is by contacting your mortgage lender. They can give you the details on their specific FHA loan requirements as well as offer you a free mortgage rate quote.