FHA Guidelines on Bad Credit on Purchase and Refinance

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will discuss and cover FHA guidelines on bad credit on home purchase and refinance. HUD, the parent of FHA, has the most lenient mortgage guidelines when it comes to home loan borrowers with bad credit. FHA Guidelines On Bad Credit do not require borrowers to pay off the 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. In the following paragraphs, we will discuss and cover FHA guidelines on bad credit and how you can get an FHA loan approval on purchase and refinance transaction.

FHA Loans For Bad Credit Scores

FHA Loans For Bad Credit Scores

FHA loans can help borrowers buy or refinance a home with bad credit scores. HUD, the parent of FHA, is the government agency backing lenders on FHA loans. Mortgage lenders pull three credit reports from the three credit reporting agencies.

  1. TransUnion
  2. Experian
  3. Equifax

In this article, we will cover and discuss FHA guidelines on bad credit on purchase and refinance transactions.

What Is The Lowest Credit Score For FHA Loans?

Gustan Cho Associates are mortgage brokers licensed in 48 states with over 170 wholesale lenders. We have wholesale lenders with no lender overlays on FHA loans and can approve FHA loans with credit scores down to 500 FICO. FHA guidelines on bad credit allows borrowers with credit scores down to 500 FICO to qualify for a home purchase and/or refinance FHA loan. Homebuyers can qualify for an FHA loan with a credit score down to 500 FICO with a 10% down payment. HUD requires all buyers with credit scores below 580 and down to 500 FICO to have at least a 10% down payment.

Can You Refinance an FHA Loan With Bad Credit?

If you currently have an FHA loan and want to refinance with a rate and term refinance, an FHA streamline refinance is your best bet. There is no appraisal requirements, no income docs, and the only requirement is that you have to be timely on your FHA loan for the past 12 months. FHA streamline refinance are quick and takes no longer than two to three weeks. Homeowners can be eligible for a cash-out refinance FHA mortgage with a 500 FICO up to an 80% loan-to-value. FHA guidelines on bad credit does not require you to pay unpaid collections and/or charged-off accounts in order to qualify for an FHA loan. However, you will need to have been timely on all of your monthly payments for the past 12 months for your best chances of an approve/eligible per automated underwriting system (AUS). Borrowers who cannot get an approve/eligible per AUS can be manually underwritten. However, manual underwriting guidelines require 24 months of timely payments. Per FHA guidelines on bad credit, homeowners do not have to worry about older unpaid collections and charged off accounts to qualify for a refinance FHA loan.

Applying For an FHA Loans With Bad Credit

Before going about repairing credit, consult with a loan officer. There are many times when credit repair can do more damage than good during the mortgage process. Credit Disputes are not allowed during the 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 how lenders view them when qualifying a mortgage loan candidate for a bad credit home loan.

FHA Guidelines on Bad Credit After Bankruptcy

Bankruptcies will definitely have devastating effects 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 in life and debt-free. There are bad credit home loan specialists like myself that can help borrowers with a prior bankruptcy. HUD requires a two-year waiting period after the Chapter 7 Bankruptcy discharged date to qualify for FHA loans.

FHA Loans During And After Chapter 13 Bankruptcy

FHA Loans During And After Chapter 13 Bankruptcy

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 the Chapter 13 Bankruptcy discharged date. Another great news for someone who has just filed for 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.

FHA Guidelines on Bad Credit With No Credit Tradelines

Re-Establishing credit right after Bankruptcy by getting a few secured credit cards will expedite boosting credit scores. Lenders will not have any problems giving a borrower a 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.

Can You Buy A House If You Had A Foreclosure?

A foreclosure will have a devastating effect on credit score just like bankruptcy. FHA guidelines on bad credit after foreclosure require mandatory waiting period after foreclosure, deed in lieu of foreclosure, and/or a short sale. Borrowers can qualify to purchase a home with an FHA Loan after meeting the 3-year waiting period after foreclosure. There is a seven-year waiting period after the recorded date of foreclosure to qualify for Conventional Loans. There is a four-year waiting period to qualify for conventional loans after the recorded date of deed in lieu of foreclosure and/or short sale.

When Is The Waiting Period Start Date For a Mortgage Approval?

The waiting period start clock starts from the date of the sheriff’s 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.

Does FHA Require Judgments To Be Paid Off?

A judgment has a devastating effect on a person’s credit score plus many lenders will not approve a person for a mortgage loan if they have unresolved unsatisfied judgments on their record. The 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, the statute of limitations may be different. In most states, judgment creditors can renew the 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.

Can You Qualify For FHA Loans With Judgments?

Can You Qualify For FHA Loans With Judgments?

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. Need to provide three months of canceled checks and/or bank statements to the lender to qualify for FHA Loans with judgments. You cannot prepay the three months of payments all at once. It needs to be seasoned for three months.

Can You Get Approved For FHA Loans With Collections?

FHA guidelines on bad credit does not require outstanding collections and/or charged-off accounts to be settled or paid off to qualify fro FHA loans. Borrowers with unpaid collections that are aged, do not pay them if applying for FHA Loans. Paying old collections accounts will have a negative credit impact on credit scores. FHA Borrowers can qualify for FHA Loans with the outstanding collection and charge-off accounts. Collection accounts that are over 2 years old will have little or no impact on credit scores.

FHA Loans With Late Payments In the Past 12 Months

Borrowers can have bad credit and qualify for home loans. But lenders want to see timely payments in the past 12 months. Late payments will definitely drop 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. See if they can give a one-time forbearance. See if they will remove the late payment from the credit report. If they don’t, credit scores will naturally improve as tradelines ages. Most lenders have overlays where late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, or a short sale are not allowed. Most lenders require timely payments in the past 12 months.

FHA Guidelines on Bad Credit With Credit Inquiries

Hard pull credit inquiries will drop credit scores. 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 are alright. There are 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 us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected]  You can also subscribe to our mortgage and real estate newsletter at www.gustancho.com.

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