Borrower Eligibility and Credit Requirement

To qualify for an FHA-insured mortgage with maximum financing, a borrower generally needs a Minimum Decision Credit Score (MDCS) of 580 or higher. Borrowers with credit scores between 500 and 579 are still eligible for FHA loans, but they are subject to stricter requirements, including a higher down payment of at least 10 percent of the adjusted value. Those with credit scores below 500 are not eligible for FHA-insured financing. However, borrowers with no credit score or insufficient credit history may still qualify through manual underwriting by establishing a non-traditional credit history.

Yes, but specific waiting periods apply depending on the type of bankruptcy filed. For a Chapter 7 bankruptcy (liquidation), a borrower is generally eligible if at least two years have elapsed since the date of discharge, provided they have re-established good credit or chosen not to incur new obligations. A period of less than two years, but not less than 12 months, may be acceptable if the bankruptcy was caused by extenuating circumstances. For Chapter 13 bankruptcy, a borrower may qualify if at least 12 months of the payout period have elapsed and payment performance has been satisfactory.

Generally, a borrower is not eligible for a new FHA-insured mortgage if they had a foreclosure or a Deed-in-Lieu of Foreclosure within the three-year period prior to the case number assignment date. This three-year waiting period begins on the date the title transferred from the borrower. Exceptions to this rule may be granted if the foreclosure was the result of documented extenuating circumstances beyond the borrower’s control, such as the death of a wage earner or serious illness, and the borrower has since re-established good credit. Divorce is typically not considered an extenuating circumstance.

U.S. citizenship is not required for mortgage eligibility, but residency status is a key factor. Borrowers with lawful permanent resident status are eligible provided they satisfy the same terms and requirements as U.S. citizens. However, recent policy updates have eliminated eligibility for non-permanent resident borrowers. Additionally, citizens of the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau may be eligible. Lenders must verify residency status using documentation from U.S. Citizenship and Immigration Services, as a Social Security card alone is insufficient to prove work or immigration status.

Lenders must include all student loans in the borrower’s liabilities, regardless of payment status. To calculate the monthly obligation, the lender uses the payment amount reported on the credit report or the actual documented payment, provided it is above zero. If the monthly payment reported is zero, the lender must calculate the monthly obligation as 0.5 percent of the outstanding loan balance. If a payment has been suspended due to COVID-19 emergency relief, the lender may use the payment amount reported prior to the suspension, as long as that amount is greater than zero.

Yes, self-employment income can be used if the borrower has a verified history of self-employment, typically for at least two years. If the history is between one and two years, the income may be considered if the borrower was previously employed in the same line of work or a related occupation for two years. The lender requires extensive documentation, including two years of individual and business tax returns. Income stability is crucial; if business income shows a decline greater than 20 percent over the analysis period, the loan may require a downgrade to manual underwriting.

Borrowers without a credit score are not automatically disqualified. Lenders can assess creditworthiness by developing a Non-Traditional Mortgage Credit Report (NTMCR) or independently verifying credit references. To establish a sufficient credit history, the borrower must provide at least three credit references, which should include rental housing payments, telephone service, or utility payments. If these are unavailable, other references like insurance premiums, school tuition, or a documented 12-month history of savings deposits may be used. This process requires manual underwriting to ensure the borrower has a demonstrated willingness to meet financial obligations.

Court-ordered judgments must generally be resolved or paid off prior to or at closing. An exception exists if the borrower has entered a valid repayment agreement, made at least three months of scheduled payments, and the judgment does not supersede the FHA lien. For collection accounts, if the cumulative balance is $2,000 or greater, the lender must verify the debt is paid, verify a payment arrangement is in place, or calculate a monthly payment equal to 5 percent of the outstanding balance to include in the debt-to-income ratio. Medical collections are excluded from this cumulative balance.

Borrowers with delinquent federal non-tax debt, including deficiency judgments from past FHA loans, are ineligible until the debt is resolved with the creditor agency. Lenders verify this by checking the Credit Alert Verification Reporting System (CAIVRS). If a debt appears, the borrower must resolve it in accordance with the Debt Collection Improvement Act before becoming eligible. Regarding federal tax debt, borrowers with tax liens may qualify if they have entered a valid repayment agreement and made at least three months of scheduled payments prior to the application.

FHA loans are primarily intended for principal residences. At least one borrower must occupy the property within 60 days of signing the security instrument and intend to continue occupancy for at least one year. FHA generally will not insure more than one principal residence for a borrower, though exceptions exist for relocations due to employment, increases in family size, or vacating a jointly-owned property due to divorce. Military personnel on active duty who cannot reside in the property due to duty station distance are considered owner-occupants if a family member resides there.