The FHA Mortgage: Can You Get Approved with Bad Credit

By Gina Pogol
Mortgage Credit Problems Columnist

You may have read that FHA underwriting guidelines are less stringent than those of conventional mortgage lenders, but what exactly does that mean? Are there credit score requirements? Will collection accounts derail your application? What about bankruptcies or foreclosures?

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FHA Mortgage Credit: TOTAL Scorecard Automated Underwriting

Like conventional lenders, FHA uses an automated underwriting system that weighs your entire application package--income, credit, assets, and equity or down payment--scores your application, and issues a recommendation: "Accept / Approve" or "Refer." If you have good credit, ample income, assets, and a stable job history, you're approved. But if you don't, FHA gives you a second chance for approval--by referring your application for manual underwriting.

Your Credit As FHA Underwriters See It

FHA underwriters consider your past credit performance the best indicator of whether you can be trusted to repay your mortgage as agreed. However, FHA also says, "A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty." So financial difficulties or irresponsible debt management in the past don't necessarily prevent FHA from granting you a loan.

Bad Credit: Who's at Fault?

You have a much greater chance of getting approved if you can demonstrate that your past credit problems stemmed from external events over which you had little or no control. For example, your company went under or there was a tragic illness in your immediate family. Even bankruptcies and foreclosures don't kill your deal if they weren't your fault (you can apply for an FHA loan 12 months after a bankruptcy or 24 after a foreclosure with mitigating circumstances). An isolated event that you have put behind you is forgivable.

However, if you have a history of paying late or blowing off creditors, even when you had enough income to honor your obligations, you are viewed less favorably. You have to prove conclusively that you have turned over a new leaf. Because underwriters are human, letters owning up to your past shortcomings and explaining why bad credit won't recur can help you get approved. Ultimately, you are judged by your actions, however, so pay your bills on time and keep your nose clean--you need at least one year of good credit to be credible. And you have to wait at least three years after a foreclosure and two years after a Chapter 7 bankruptcy (one year after Chapter 13) if they were caused by events within your control, like overspending.

What About Credit Scores?

What is the FHA minimum credit score now? Changes to FHA policy in 2010 mean that borrowers need a FICO score of at least 580 to qualify for some FHA loans. With a higher down payment, borrowers with lower credit scores may be accepted. So if you know that your score is ugly, ask lenders if they have minimum scores when you shop for your mortgage. You can evaluate many lenders easily by completing the form on this site.

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