FHA Guidelines On Bad Credit With Outstanding Collections

This BLOG On FHA Guidelines On Bad Credit With Outstanding Collections Was UPDATED On July 9, 2017

HUD, the parent of FHA, has the most lenient mortgage guidelines when it comes for home loan borrowers with bad credit.

  • FHA Guidelines On Bad Credit does not require potential home buyers to pay off outstanding collection and charge off accounts.
  • Each type of bad credit item is viewed differently and ranked by the order of most damaging to least damaging by lenders.

Mortgage lenders pull three credit reports from the three credit reporting agencies.

  1. TransUnion
  2. Experian
  3. Equifax

Key FHA Guidelines On Bad Credit

Before going about repairing credit, consult with a loan officer.

  • There are many times where credit repair can do more damage than good during the mortgage process.
  • Credit Disputes are not allowed during mortgage process.
  • All credit disputes need to be retracted prior to issuance of pre-approvals with a few exemptions. 

In the following paragraphs we will take the most damaging negative credit item to the least damaging. We will summarize on how lenders view them when qualifying a mortgage loan candidate for a bad credit home loan.

FHA Guidelines On Bad Credit And Bankruptcy

Bankruptcies will definitely have devastating affects on credit scores.

  • Whether it is a Chapter 7 or Chapter 13 Bankruptcy, credit scores will most likely drop over 150 points to 200 or more points.
  • However, this sudden plummet in credit scores is temporary.
  • Consumer credit scores will go back up once the bankruptcy ages.
  • To expedite boosting credit scores, consumers can add positive credit such as secured credit cards as soon as possible after a Bankruptcy discharge.
  • However, a bankruptcy will get a person a fresh start on life and debt free. 
  • There are bad credit home loan specialists like myself that can help mortgage loan borrowers with a prior bankruptcy.
  • FHA requires a two year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Loans.
  • Home Buyers can qualify for FHA Loans one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval.
  • There is no waiting period to qualify for FHA Loans after Chapter 13 Bankruptcy discharged date.
  • Another great news with someone who has just filed bankruptcy is that their credit scores will not remain low forever. 
  • Credit scores will naturally improve as months pass by. 
  • It is like recovering from a hangover. 
  • As time passes, credit scores will improve even if consumers do not do anything.
  • Re-Establishing credit right after Bankruptcy by getting a few secured credit cards will expedite boosting credit scores. 
  • A mortgage lender will not have any problems giving a borrower a mortgage loan approval after the borrower meets the bankruptcy waiting period requirement.
  • Most lenders will not approve anyone who had late payments after bankruptcy.
  • A bankruptcy will be on a person’s credit report for 10 years.

Qualifying For Mortgage After Foreclosure

A foreclosure will have devastating affect on credit score just like a bankruptcy.

  • A mortgage borrower can qualify to purchase a home with a FHA Loan after meeting the 3 year waiting period after foreclosure.
  • There is a seven year waiting period after recorded date of foreclosure to qualify for Conventional Loans.
  • There is a four year waiting period to qualify for conventional loans after recorded date of deed in lieu of foreclosure and/or short sale.
  • The waiting period start clock starts from the date of the sheriff sale or the date when their names were transferred out of the deed of the house to the lender’s name. 
  • As with bankruptcy, the drop in credit scores is temporary and a person who has had a foreclosure can get high credit scores as time passes and as they re-establish their credit. 
  • A foreclosure will be on a person’s credit report for a period of 7 years.

Qualifying For FHA Loans With Judgments

A judgment has devastating affect on a person’s credit score plus many mortgage lenders will not approve a person for a mortgage loan if they have unresolved unsatisfied judgments on their record.

  • Statute of Limitations on judgments depends on the state.
  • In most states,  judgments are active for at 10 years.
  • Again, depending on the state the judgment was issued, statute of limitations may be different. 
  • In most states,  judgment creditors can renew judgment for another 10 years once the first 10 years statute of limitations is up. 
  • To get rid of a civil judgment, the person either has to file bankruptcy, pay the judgment off, enter into a payment plan with the judgment creditor, or get the judgment vacated. 
  • Judgments can be settled with the judgment creditor.
  • Borrowers can qualify for FHA Loans with judgments.
  • Borrowers can pay the judgment off prior to or at closing.
  • Borrowers can also enter into a written payment agreement with the judgment creditor and provide three months canceled checks and/or bank statements to lender to qualify for FHA Loans with judgments.

FHA Guidelines On Collections And Charge Offs

FHA Loan Borrowers with unpaid collections that are aged, do not pay them if applying for FHA Loans.

  • Paying an old collections accounts will have negative credit impact on credit scores. 
  • FHA Borrowers can qualify for FHA Loans with outstanding collection and charge off accounts. 
  • Collection accounts that are over 2 years old will have little or no impact on credit scores.

Late Payments

Late payments will definitely drop your credit scores by at least 40 or more points.

  • Consumers who paid a monthly installment and/or revolving debt 30 days or more late, contact the creditor and see if they can give a one time forbearance and see if they will remove late payment from credit report. 
  • If they don’t, credit scores will naturally improve as tradelines ages.
  • Most lenders have lender overlays where late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale is not allowed.
  • Most lenders require timely payments in past 12 months.

Credit Inquiries

Hard pull credit inquiries will drop credit score.

  • Each hard credit pull will drop credit scores by at least 2 points. 
  • Try not to apply for credit all at once. 
  • One or two credit inquiries in a six month period is alright.

There are mortgage lenders like myself who specialize in bad credit home loan programs.  Borrowers who have had prior bad credit and are looking for a bad credit home loan please contact me at  262-716-8151 or email me at gcho@gustancho.com.  You can also subscribe to our mortgage and real estate newsletter at www.gustancho.com .

Related> Mortgage Loans With Under 580 FICO Credit Scores

Related> Bad Credit Mortgage Loans: FHA Loans to the Rescue

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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