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FHA Loan with Bad Credit Case Scenario
Hello,
I have a case scenario with qualifying for an FHA loan with bad credit and late payments.
I’m a first-time homebuyer in Mississippi, and I’m looking for an FHA lender who is experienced with borrowers who have a lower mortgage score and some complicated credit history.
My current middle mortgage score is approximately 602. I have stable employment and qualifying income, and I currently have over $40,000 in verified liquid assets between my savings and money-market accounts. I also have documented SSI and child-support income that I would like to have considered if eligible.
My main concern is my past credit history. I have some significant late-payment history involving Credit Acceptance and Capital One. I recently spoke with another lender who declined to work with me because they considered the history a pattern of major delinquencies and rolling late payments.
The Credit Acceptance account is particularly complicated because it involves a vehicle that is legally my former spouse’s responsibility under our divorce decree/court order. The vehicle debt is still in my name, but the court order assigns responsibility for the debt to my former spouse, and there is documentation regarding his responsibility for the payments. Another lender I am currently working with believes they can exclude or otherwise negate the Credit Acceptance obligation when underwriting my mortgage.
I’m interested in an FHA mortgage and would like to know:
1. Whether you work with FHA borrowers with a 602 middle mortgage score and this type of credit history.
2. Whether you can run my file through FHA automated underwriting and determine the AUS finding.
3. If the AUS result is a Refer, whether you allow FHA manual underwriting.
4. How your underwriting guidelines treat multiple historical late payments, particularly on the Credit Acceptance account.
5. Whether the Credit Acceptance debt can potentially be excluded or treated as a contingent liability because my divorce decree assigns responsibility for the debt to my former spouse.
6. Whether my substantial verified liquid reserves can be considered as a compensating factor if manual underwriting is necessary.
7. Whether you have any lender overlays that would prevent you from considering an FHA borrower with a 602 middle score.
I’m not looking for a lender who will overlook the credit history. I’m looking for someone who can review the entire file and determine whether there is a legitimate FHA path forward based on the circumstances and documentation.
If this sounds like a file your team may be able to work with, I would be happy to provide the documentation you need for an initial review.
Thank you for your time. I look forward to hearing from you.
Best,
Tina
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1 Reply
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Hi Tina,
Thank you for providing the requested information. With a middle mortgage score of about 602 and only a few late payments, you remain eligible for FHA loan consideration.
Your FHA loan application will be thoroughly reviewed and will not be declined solely due to your credit score.
A Mortgage Score of 602 Does Not Automatically Disqualify You from FHA Loan Eligibility
- Your middle mortgage score of 602 exceeds the FHA minimum requirement of 580 for full financing.
- FHA does not require a score of 620, 640, or 660 to qualify.
- While approval is not guaranteed, we will evaluate your payment history, debt-to-income ratio, assets, housing background, and details of your Credit Acceptance account.
- Our team regularly assists FHA borrowers with lower credit scores or complex credit histories who need manual review.
The First Step is to Submit Your File Through the FHA’s Automated Loan Approval System
We will ensure your application is complete and submit it through the FHA-approved automated system, FHA TOTAL Mortgage. This system typically returns either an Accept or Refer result. An Accept allows the loan to proceed automatically. A Refer requires manual review. FHA guidelines state that a loan should not be approved or denied solely based on the TOTAL result.
Different FHA lenders may reach different decisions than your previous lender. If you receive a Refer, manual underwriting remains an option. Our team has extensive experience with FHA files requiring manual underwriting.
Manual review involves a detailed examination of your recent payment history. FHA guidelines allow a reviewer to accept your credit history if your housing and loan payments have been on time for the past 12 months and if there have been no more than two payments 30 days late in the last 24 months. FHA also applies specific rules for significant credit card issues. If standard credit criteria are not met, the reviewer will consider whether late payments resulted from debt management challenges, neglect of financial obligations, or other documented circumstances.
How Mortgage Underwriters Look at Auto Loan Under Borrower’s Name But Divorce Decree Grants Auto to Ex-Husband
We will review your Credit Acceptance and Capital One payment histories, focusing on the timing and reasons for any 30-, 60-, or 90-day late payments. The divorce decree is important because it assigned the vehicle debt to your ex-spouse. FHA has specific rules for debts related to divorce decrees and court orders.
When a debt is assigned by a divorce decree or court order, FHA does not require the lender to verify 12 months of on-time payments by the other responsible party, as it does for other debts.
The lender must obtain the divorce decree or court order assigning payment responsibility. I recommend focusing on several key elements: the divorce decree or court order, the section assigning responsibility for the Credit Acceptance debt, the account history, documentation of payment responsibility, and any records showing your ex-spouse was responsible for the vehicle. Depending on the account structure, it may be possible to exclude the monthly Credit Acceptance payment from your debt-to-income ratio for FHA purposes.
The Divorce Decree Does Not Automatically Erase the Late Payments
This may be the most significant factor in your application. Even if the Credit Acceptance payment is excluded from your debt-to-income ratio, the late payment history will still be evaluated. The account remains on your credit report and reflects late payments, which the reviewer must consider as part of your credit history. Therefore, it is essential to gather all necessary documentation.
Payment History of Auto Loan Prior to and After Divorce
We will need to clarify who possessed the vehicle, who was responsible for payments, the date the divorce decree was entered, whether your ex-spouse complied with the court order, and whether any late payments occurred before or after your ex-spouse assumed responsibility for the account. These factors can significantly influence the reviewer’s decision. Your $40,000 in cash or readily available funds is a substantial asset. Money market funds further strengthen your application. Documented cash reserves provide a considerable advantage.
FHA typically requires at least three months of mortgage payments in reserves for a one- or two-unit property, or six months for a three- or four-unit property, when reserves are used to qualify.
The required reserve amount depends on eligible assets remaining after closing. With over $40,000 in verified funds, you have a significant advantage, subject to your purchase price, mortgage payment, required cash to close, and remaining assets. If your score is 580 or higher, FHA’s manual review guidelines may allow higher debt limits with proper documentation.
What Kind of Income Can I Use as Qualified Income
Supplemental Security Income (SSI) may be considered qualifying income if it meets FHA’s documentation and continuation requirements. Acceptable documentation includes an SSA award letter, bank statements showing deposits, tax documents, or other approved evidence, depending on the benefit type. If the award documentation does not specify an expiration date, FHA generally assumes the income will continue and does not require proof of the medical condition. For court-ordered support, FHA typically requires a divorce decree, separation agreement, court order, or similar document, along with proof of payment. The income must be expected to continue for the required duration.
Recent payments can be shown through bank deposits, canceled checks, or records from the child-support agency. We would review your child’s ages, the court order, payment history, and the anticipated duration of support.
I would not decline your file based solely on the information provided. While certain issues require attention, particularly the late payments with Credit Acceptance and Capital One, your file demonstrates several strengths: stable employment and qualifying income, a 602 middle mortgage score, over $40,000 in verified funds, potentially qualifying SSI and child support income, and a court order assigning the Credit Acceptance debt to your ex-spouse.
Mortgage Underwriters Will Review Your Complete Credit Report
The next step is to review your complete credit report and supporting documents and determine the outcome from the FHA TOTAL system before making any decisions. If the system provides an Accept, we will proceed using the automatic approval guidelines.
If the system provides a Refer, we will assess whether your payment history meets FHA manual review criteria and whether the divorce and other supporting documents justify approval. The most recent FHA requirements are outlined in HUD Handbook 4000.1, updated by HUD on August 12, 2026.
If you would like us to review your file, please provide your most recent tri-merge mortgage credit report, divorce decree or court order, Credit Acceptance and Capital One payment histories, recent pay stubs and W-2s, SSI award or benefit documentation, child support order and proof of payments, and your latest savings and money market account statement. Our goal is not to overlook negative credit but to determine whether your circumstances can be thoroughly documented and if your complete file meets FHA requirements. Based on the information you have provided, I believe your file merits a comprehensive review before you decide whether to continue pursuing FHA financing.
Most Recent Updated HUD Guidelines on FHA Loans
The current HUD Handbook page confirms that the August 12, 2026 update is the most recent published version of Handbook 4000.1. Accordingly, I have based this response on the current FHA framework rather than previous lender guidelines. I have emphasized the divorce decree issue because it is likely the most significant underwriting factor in your case. The decree may allow exclusion of the payment, but it does not automatically remove the negative credit history.
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