FHA Loan With Bad Credit Versus Late Payments Mortgage Guidelines

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This ARTICLE On FHA Loan With Bad Credit Versus Late Payments Mortgage Guidelines Was PUBLISHED On June 22nd, 2020

There is a major difference in qualifying for an FHA Loan With Bad Credit Versus Late Payments.

  • FHA loans are the best loan program for homebuyers with less than perfect credit
  • HUD, the parent of FHA, is very forgiving with prior bad credit
  • HUD is a federal agency that sets FHA Agency Mortgage Guidelines
  • Lenders need to have their borrowers meet the minimum FHA guidelines on FHA loans in order for HUD to insure FHA loans that default and go into foreclosure
  • Due to FHA’s guarantee against losses due to borrower default, lenders can offer FHA loans with low credit scores at great rates
  • Borrowers can qualify for an FHA loan with bad credit
  • Borrowers can qualify for FHA loans with outstanding collections and charged-off accounts
  • The outstanding balances on outstanding collections and/or charged-off accounts do not have to be paid to qualify for FHA loans

However, timely payments in the past 12 months are normally required to get an approve/eligible per automated underwriting system.

FHA Loan With Bad Credit Versus Late Payments: Importance Of Timely Payments In The Past 12 Months

HUD understands that people can go through tough times such as unemployment, divorce, and medical issues.

  • However, HUD wants to see that consumers have fully recovered and re-established credit
  • It will be difficult to get an approve/eligible per AUS with late payments in the past twelve months
  • Timely payments on all debt obligations in the past 12 months are very important
  • FHA and VA allow manual underwriting for borrowers who cannot get an approve/eligible per automated underwriting system
  • However, manual underwriting guidelines apply
  • On manual underwriting, borrowers need to have been timely in the past 24 months

In this article, we will discuss and cover FHA Loan With Bad Credit Versus Late Payments Mortgage Guidelines.

Difference Between FHA Loan With Bad Credit Versus Late Payments

There is a huge difference between qualifying for an FHA Loan With Bad Credit Versus Late Payments.

  • Lenders want to see a consistent pattern of timely payments for at least 12 months
  • Many consumers will go through financial stress during their lifetime
  • Unemployment, divorce, and medical illness are some reasons where Americans get an interruption in income
  • With an interruption in income, people cannot make their monthly debt payments timely
  • This often hurts their credit scores
  • However, most consumers recover and gain new employment
  • Re-establishing credit after bad credit is very important
  • Borrowers can qualify for a mortgage after bankruptcy, foreclosure, deed in lieu of foreclosure, short-sale
  • However, borrowers need to meet the minimum waiting period requirements after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale to qualify for an FHA loan
  • Late payments after bankruptcy and/or a housing event is considered very bad
  • Most lenders will not accept any borrowers with late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale

One or two late payments after bankruptcy and/or foreclosure may not be a deal killer. However, multiple late payments will be deal killer.

Types Of Bad Credit

Borrowers can qualify for FHA loans with bad credit. However, lenders want to see timely payments in the past 12 months. Borrowers do not have to pay outstanding collections and/or charged-offs to qualify for an FHA loan. However, after the bad credit period, borrowers need to have been timely. Let’s take a case scenario and say you are the lender. Would you lend money to someone who has been late recently with their debt obligations? Not likely. This is how lenders feel.

Here are the various types of bad credit borrowers can have and still qualify for an FHA loan with 12 months of timely payments:

  • Outstanding collections no matter how high the outstanding balance
  • Outstanding charged-off accounts no matter how high the balance 
  • Late payments, however, not in the past 12 months
  • Late payments during Chapter 13 Bankruptcy repayment period but not in the past 24 months
  • Late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale are normally deal killers
  • Repossessions eventually become charged-off accounts

Credit disputes during the mortgage process are not allowed. If you have any derogatory credit tradelines on your credit report, do NOT dispute them. Credit disputes will halt the mortgage process. The credit disputes need to be retracted before the mortgage process to proceed.

Late Payments After Bankruptcy And Foreclosure

Borrowers can qualify with bad credit. However, no late payments in the past 24 months. Manual underwriting guidelines require timely payments in the past 24 months. Late payments after bankruptcy and/or foreclosure is a definite deal killer. Lenders consider borrowers with late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale as second offenders and want absolutely nothing to do with them. However, one or two late payments is not always a deal killer. Gustan Cho Associates are experts in helping borrowers with late payments after bankruptcy and/or foreclosure qualify for a mortgage. GCA Mortgage Group has alternative non-QM mortgage programs to help borrowers with late payments after bankruptcy and/or foreclosure. To qualify for a mortgage with a lender with no lender overlays on government and conventional loans, please contact us at GCA Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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