This is Part Two in a three part series about FHA mortgage loans. Part One talked about the changes in FHA loans going into effect on Jan. 1 and the things that wouldn’t be changing. In this installment, I will cover some credit issues having to do with FHA loans.

FHA mortgage loans do not have a minimum credit score requirement. However, FHA does not make the loans, they insure them. The lenders that make the loans may have different rules. In this case, it is the Golden Rule; he with the gold makes the rule!

1. Different lenders, because of the above, will have different cut off points for credit score. The lowest credit score that we can use is 550. 
2. There are charges for lower credit score customers, depending on the investor on the loan. If the score is 620 or above, normally, there is no extra charge for credit score. If the score is below 580, the charge goes up.
3. FHA borrowers do not have to have a credit score. If no score is received, the customer can qualify on what is called “non-traditional” credit. For example, credit rating from landlord, insurance agency, power company, TV cable company or telephone company. At least three sources of “non-traditional” credit are generally required.
4. Chapter 7 Bankruptcy is acceptable after two years from discharge (not filing) if new credit has been established. There are exceptions to this deadline in the case of extenuating circumstances. Trust me; the inability to keep up with your responsibilities is not an extenuating circumstance. Death, preferably your own, will often qualify your for this exception.
5. Chapter 13 Bankruptcy after a year in the program, with the Trustee approval, will be considered under FHA guidelines. All payments in the program must have been made on time.
6. FHA underwriting pays very close attention to the past 12 months of payment history. Normally, if there are late payments in the past 12 months, an applicant should wait until the last late payment is over 12 months old. Exception to this rule: when an automated approval is received, this requirement may be superseded.

This is just a brief overview of what underwriting requirements are for FHA mortgage loans. Every FHA loan application is considered on its own. The automated system used to underwrite FHA loans is called the “Total Scorecard,” but can, in certain circumstances, be overridden by the underwriter. Stay tuned for Part Three of this series.

authored by Fred Chamberlin, senior mortgage consultant, Eugene/Springfield Oregon, 541-342-7576