How Credit Repair To Qualify For FHA Loans Can Backfire On Borrowers

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How Credit Repair To Qualify For FHA Loans Can Backfire On Borrowers

How Credit Repair To Qualify For FHA Loans Can Backfire On Borrowers Was UPDATED On January 1st, 2018

FHA Loans is the most popular loan program in the United States. The United States Department Of Housing And Urban Development (HUD) is the parent of The Federal Housing Administration (FHA). FHA has the most lenient mortgage lending guidelines when it comes to owner occupant mortgage loans. Credit Repair To Qualify For FHA Loans is often not required.

  • Many first time home buyers who had prior bad credit or even home buyers with bad credit often assume that credit to qualify for FHA Loans is needed prior to even contacting a mortgage loan originator
  • Credit Repair is a huge business where not there are television ads on credit repair businesses
  • Many consumers get suckered into a credit repair program offered by the tens of thousands of companies
  • However, credit repair to qualify for FHA Loans can backfire on mortgage borrowers if it is done the wrong way
  • There are ways of trying to boost credit scores and correct erroneous tradelines on consumer credit reports
  • However, many credit repair companies and/or consultants will dispute every single derogatory credit tradeline on a consumer credit report

Credit Disputes, with the exception on medical collections, is not allowed during the mortgage loan process.

Is Credit Repair To Qualify For FHA Loans Recommended?

Credit Repair To Qualify For Mortgage is not recommended. Many borrowers do not realize that they can qualify for mortgage with prior bad credit.

  • However, lenders want to see timely payment on all payments in the past 12 months
  • Borrowers can qualify for FHA Loans with outstanding collections, charge off accounts, and late payments
  • Collections and charge offs do not have to be paid off to qualify for FHA Loans under FHA Guidelines
  • Credit Repair to qualify for FHA Loans can backfire on borrowers

Qualifying For Credit Repair When applying for a mortgage loan, there are three factors that are very important:

  1. Income
  2. Borrower’s Liabilities
  3. Credit Profile

All mortgage loan programs has a minimum credit score for borrowers to meet. FHA requires a minimum of 580 credit scores for a home buyer to qualify for a 3.5% down payment home purchase FHA Loan.

There are two types of payments home buyers need to come up with:

  1. Down Payment
  2. Closing Costs

Down Payment can be gifted to home buyers under FHA Guidelines. Most FHA Home Buyers do not have to worry about closing costs.

  • Closing costs can be covered with sellers concessions
  • And/or lender credit

Credit Repair To Qualify For FHA Loans: Credit and Credit Scores

Mortgage lenders want to make sure that home buyers are able to afford monthly mortgage payment and that the mortgage payment will be timely.

  • In a way they are predicting your future creditworthiness and future payment ability by combining and analyzing the three factors
  •  Credit scores are taken seriously because it shows credit history on past credit payments
  • A higher credit score means a lower mortgage rate and costs for a home buyer or a refinance mortgage loan client
  • For those who have errors on their credit report, it is strongly suggested that they either hire a credit repair company or repair their credit repair on their own

Credit Repair To Qualify For FHA Loans And Credit Repair Companies

Whatever a credit repair company can do, on can do it themselves. Home buyers do not need to hire credit repair to qualify for FHA Loans.

  • However, many folks do not want to be bothered with disputing their erroneous or negative credit
  • Many hire a credit repair company
  • Credit repair should be taken seriously and every consumer should monitor their credit at least once a year

There are many dangers in credit repair during the mortgage loan application process people need to be aware about.

Credit Repair To Qualify For FHA Loans: Repairing Own Credit

We have covered many blogs about credit repair and how to repair own credit.

  • We will be blogging more on credit repair in future blogs
  • As for credit repair companies, consumers should due diligence on which credit repair company they hire
  • Ask the credit repair company for references
  • Referrals are probably the best route to take in hiring a credit repair company
  • Mortgage borrowers do not want to hire a credit repair company that just takes your money and let the file just sit

Credit Repair Takes Time

Credit repair does take time.

  • Bad credit items cannot deleted overnight
  • It takes weeks and months to delete and/or correct erroneous credit items or negative credit items
  • It might take several months if not over a year for a consumer to dispute their credit and get the correct/updated results 
  • Bankruptcies, judgments, collections, tax liens, and charge offs can be deleted from credit report by disputing them 
  • Even if those negative items are correct, consumers can still dispute them and if you get lucky, those items can and often times do get deleted
  • However, even if judgments, bankruptcies, and foreclosures get deleted from credit report, it needs to be disclosed when applying for mortgage
  • Why do credit repair if it still needs to be disclosed?

Dangers Of Credit Repair In Qualifying For FHA Loans

All mortgage loan programs, whether it is FHA, VA, USDA, Fannie Mae, Freddie Mac will not allow credit disputes during mortgage process.

This is why:

  • When a consumer disputes a credit tradeline, the credit bureaus automatically negate the negative tradeline from the credit score formula
  • So what this means is that when a consumer disputes a late payment, collection, charge off, or other derogatory credit, the credit scoring formula will take it as if the negative item doesn’t exists
  • This causes a spike in consumer credit scores
  • When mortgage lenders requests that borrowers retract credit disputes, the consumer credit scores will drop again because credit scoring system will count the derogatory item back to the credit scoring model
  • Medical disputes are exempt from credit disputes
  • Zero balance non-medical collections are exempt from credit disputes
  • Non-medical collections with a total aggregate balances of under $1,000 are exempt from credit disputes
  • Some creditors will not retract credit disputes when requested
  • When creditors do not retract credit disputes the mortgage process cannot proceed and will be HALTED and in SUSPENSE Status until the disputes are retracted
  • Retracting credit disputes can drop credit scores where mortgage borrowers will no longer qualify

Home Buyers who need to qualify for FHA Loans or other loan program with a direct lender with no overlays on government and/or conventional loans, feel free to contact The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com . We are available 7 days a week, evenings, weekends, and holidays.

Related> Does Credit Repair Work?

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