FHA Minimum Credit Scores
As a general rule, the FHA sets forth the following credit score guidelines:
- No one with a score lower than 500 is eligible for the FHA loan
- If a borrower has a credit score between 500 and 580, they are required to put down at least 10 percent of the purchase price of the home
- If a borrower has a credit score over 580, he is able to put down a minimum of 3.5 percent on the home
What Else Matters?
In addition to the credit scores, however, are your other qualifying factors. For example, if you have a credit score of 590, yet you have debt ratios that total 33 on the front-end and 45 percent on the back-end, chances are you will not get approved for FHA financing because your debt ratios are too high. The FHA looks at the entire financial picture before making a decision. Your credit scores play a vital role, but they are not the only determining factor. In general, you must have the following requirements:
- Front-end debt ratio around 31 percent
- Back-end debt ratio around 43 percent
- Stable income received from the same employer for the last 2 years
- No late payments in the last 12 months
- All collections must be paid before applying for the loan
These are general guidelines to get approved for an FHA loan. If you had negative circumstances as a result of a job loss or decrease in income due to circumstances outside of your control, your lender may be able to get you qualified for the FHA Back-to-Work Program. In this program, you are granted an exception to the rules as a result of losing your job or a decrease in the size of your income due to a company closing or forcing you to change positions.
Proving you Recovered
The key factor in qualifying for the Back-to-Work program is proving that you recovered from the event. You can have several negative consequences showing on your credit report as a result of the change in your income, but it should also show that you bounced back since then. You can use your credit report and income documents to show this event.
Your credit report should show that you have paid all of your debts on time since you recovered from your loss in income. Typically, the lender looks for a series of 12 months in a row with no late payments. They also look for new credit that you established and have been able to keep in good standing since the economic event. The credit report typically speaks for itself, so you will not have to provide much more proof to show that you bounced back financially.
Your income documents will help the lender see that you are now making enough money again to cover your debts. You will need to show the decrease in your income with the appropriate tax documents from that time period along with current tax documents and paystubs that show that your income has increased. The lender will need to determine that your new income is stable and set to continue for the foreseeable future in order to be used for qualification purposes.
Waiting Periods for FHA Back-to-Work Program
If you do qualify based on your credit scores and individual qualifying factors, you will only be required to wait 12 months after significant economic events occurred. This means that a bankruptcy or foreclosure only needs to be 12 months in your past in order for you to apply for the FHA Back-to-Work program. This is great news for those people that suffered but have bounced back and wish to become homeowners again.
You do not need to be a first-time homebuyer in order to qualify for the FHA program – anyone that has the qualifying factors can apply for the loan. It is a great way to get back into the swing of things with a new loan that has affordable terms. Typically, FHA loans have low interest rates and costs that most people can afford, enabling you to become a homeowner once again.