Friday, March 18, 2011

Borrowers with bad credit can still qualify for FHA loans


For those individuals with past credit problems who truly want get those skeletons out of the closet and move forward, I want to offer you hope. I too was one of those people who was plagued with credit issues from my past. Be it from a loss of a job, health problems, or divorce it doesn't matter. There are millions of people that find themselves in the same situation as you and need guidance on how to put the past behind them. Prospective home buyers with bad credit may think they have little or no options available to them under the current more restrictive lender programs. But under certain circumstances and a little work, it is possible to qualify for an FHA home loan. The quickest way to find out if you qualify, is to request a FREE Consultation.  While many borrowers with good credit have several options available for financing a home purchase or refinancing their mortgage, borrowers with credit problems just might need to start with a little cleaning project.
I want you to understand for every credit problem there is a solution. It is my job as your loan officer to help guide you and get you pointed in the right direction. Case in point: Paying off some collections can actually have a negative or adverse effect on your overall credit score. The reason is somewhat confusing to the average person, but answer is quite simple. In some instances, collections have parked themselves on your credit report for a year or more without any activity. This is actually seen as a line item that is paid as agreed. How strange is that? Well, you'll find many credit scoring models just as crazy. So let's see if we can paint a clearer picture, and illustrate what you need to do in order to be considered a candidate for an FHA loan.

FHA Loans and Credit Problems

  • No Credit History: If you lack credit history, it's not all that bad. FHA allows a lender to substitute other forms of non-traditional credit known as alternative credit when considering a prospective borrower's loan application. These items include utility accounts such as Electric, Gas, Water and Cable. In addition, your Auto Insurance, Cellular Phone Service, and a letter from a Landlord can be used to supplement your credit report to offset the lack of tradition credit.
  • Bankruptcy: Depending on the type of bankruptcy filing and how long ago it was filed, an FHA loan may still be available for you. For Chapter 7, you will need to wait 24 months after the discharge in order to be considered for a home loan. However, you must have kept your credit free of delinquencies during that waiting period. In addition, borrowers must have stable 24 month combined work history, qualify financially, and have a minimum credit score of 600. Lower credit scores can be considered with an increased down payment. If you have not re-established any new credit accounts since filing bankruptcy, you might want to contact us and so we can do free credit analysis in order to diagnose your credit report in preparation for your submitting your application for a home loan. Chapter 13, on the other hand gives a buyer more latitude. Borrowers can actually purchase a home without their bankruptcy being discharged. Clearly all lenders are different, but generally after 12 months of making of successful payments to the Trustee or Court you should be eligible to purchase. The final decision will the Trustee, without the authorization from the Court you will not be able to qualify for a mortgage. Of course the simplest solution is just to payoff your Court ordered debt, get your discharge and you will have no waiting period.
  • Previous Foreclosure or Deed in Lieu: Although a VA home loan is the quickest pathway to buying a home after a foreclosure, deed in lieu, or short sale (2 years) FHA's stance is pretty straight forward. The general rule of thumb is if a borrower has had a previous foreclosure or a deed in lieu of, whereby the loan was either an Conventional or VA loan, the borrower is required to wait 3 years after the Trustee's Sale date. There are some exceptions that can be made under extenuating circumstances such as a death in the family, loss of job or business, etc. If the borrower’s loan was an FHA and HUD paid a claim to the lender, the borrower was reported to the Federal Credit Alert System. Unless that claim is repaid to HUD, the borrower will be unable to obtain FHA.
  • Short Sales: Although there are varied opinions on the subject, FHA is pretty straight forward regarding financing a home after a short sale. For all practical purposes, FHA views a short sale just like a foreclosure. For those interested in purchasing a home after a short sale, there are certainly exceptions to the 3 year waiting period. So if you are considering selling your home on a short sale and would like the ability to purchase another home after closing, PLEASE read this article I have written (Can I buy a home after a short sale). It just might make the difference between buying and renting for the next 3 years. For those individuals who have already completed their short sale, and are interested in seeing if you can qualify to purchase a home using FHA financing, this excerpt, taken from the:  Mortgage Credit Analysis Handbook: HUD 4155.1 Chapter 4, Section C Paragraph L . (See below) should make things very clear to understand. If you have any addition questions, please request a FREE Consultation.

  • Late payments: This can be the kiss of death. FHA loan requirement lenders to look at the overall pattern of credit, but more importantly over the past 12 months. If you are consistently paying your bills late, this will disqualify you from an FHA loan. However, if you paid bills were late for a short time while unemployed or in poor health, you may still be able to qualify for an FHA mortgage. Foreclosure FHA loan requirements usually require a waiting period of at least three years after a foreclosure, but sometimes an exception can be made for extenuating circumstances like illness, death of a family member or other cataclysmic event.

  • Collections and Judgments: FHA mortgage guidelines do not require minor collections to be paid, but it is at the discretion of the lender’s underwriter whether or not certain collections need to be paid off. Judgments on the other hand, must be paid in full before qualifying with a few exceptions. Child Support, State or Federal Tax Lien can be worked around if you have maintained a payment arrangement or a minimum of 6 months, but certain restriction could apply.

  • Federal Debts: Borrowers who are delinquent on a federal debt such as a student loans, are not eligible for an FHA loan unless they have been on a approved repayment plan. In some cases, loans that are in default can be refinanced and taken out of delinquency in order to move forward with your application request.
If you have bad credit and or extensive debt resulting in credit scores below 580, you may still be able to qualify for an FHA loan, but you may be required to make a larger down payment instead of the minimum required 3.5% down payment. Paying your credit obligations on time and trying to reduce your debt will certainly make your life a lot easy and of course increase the chances of being approved for a home loan with the best terms and lowest rates.
 To find out if you qualify for an FHA mortgage, get started today and request a  Free Credit Analysis but either way, make a commitment to yourself to open up the closet, bring out the dead and bury bones.

George Raymondo on Zillow

George Raymondo on Zillow