In this blog, we will cover fixing your credit to qualify for FHA loan to buy a house. Homebuyers planning on purchasing a home in the near future, do not wait until the last minute. There are two very important factors when qualifying for an FHA loan. The first is income, and the second is credit. Borrowers need documented income to qualify for any mortgage loan.
Cash income does not count in the mortgage business. All income, deposits, verification of rent, and other documentations in the mortgage business must be sourced and documented. It cannot be cash.
Cash does not count in the finance world. It is not like it used to be before the 2008 Real Estate and Mortgage Meltdown, where stated income and no doc mortgage programs were very common, and lending was super easy. Everything is income documented, and all mortgage lenders will require W-2s, 1099’s, paycheck stubs, and two years of tax returns.
How Is Income For a Mortgage Verified With The Internal Revenue Service
Mortgage lenders will verify income and tax returns with the Internal Revenue Service. Borrowers can have the best credit in the world, but if they do not have documented income, then there is no way they can qualify for an FHA loan. For borrowers with little to no income or no documented income, HUD allows them to have non-occupant co-borrowers to be added to their FHA Loan so they can qualify for income.
Gustan Cho Associates has traditional and non-traditional mortgage loan programs. We now have no income verification mortgage loans for self-employed borrowers. No-doc loans, stated-income mortgages, and DSCR mortgages are becoming very popular.
However, you can have very low credit scores, prior bad credit, prior bankruptcy, prior foreclosure, prior short sale, prior deed in lieu of foreclosure, prior judgments, tax liens, charge offs, late payments, and outstanding unpaid collection accounts. But as long as borrowers have documented income, they can qualify for a 3.5% down payment FHA Home Purchase mortgage loan. FHA is extremely lenient with credit, credit history, and prior bad credit. In this article, we will discuss and cover fixing your credit to qualify for a mortgage.
Fixing Your Credit To Qualify For FHA Loan To Meet The Minimum Credit Requirements
Even though you may meet the bare minimum FHA Credit Score Requirement, home buyers with less than perfect credit and credit history should think about fixing your credit to qualify for FHA loan way prior to buying or shopping a home.
Do not hire expense credit repair companies to qualify for a mortgage. Whatever a credit repair company can do, you can do it as well if not better. The team at Gustan Cho Associates can help you maximize your credit scores to qualify for a mortgage.
Credit repair is not often necessary. Credit repair may work but can backfire on borrowers. Not every consumer may need extensive credit repair to refresh their overall credit scores and credit report. Just a few tricks of the trade can easily boost a consumer’s credit scores substantially.
How Can You Delete Derogatory Credit Tradelines Quickly
If you file a police report and state you are a victim of identity theft, you can be rest assured that all of your derogatory credit tradelines will be deleted off your credit report in a matter of days to no later than a few weeks. There are credit repair companies that can actually delete public records if the consumer provides a police report of identity theft such as the following in a matter of weeks:
- tax liens
- child support payments/alimony payments
- late payments
- collection accounts
- charge-off accounts
- all public records
- all other types of derogatory information off one’s credit report
We will discuss whether or not this task of removing public records is a recommended way of fixing your credit to qualify for FHA Loan in a later paragraph of this blog. FHA requires a minimum credit score of 580 FICO for a home buyer to qualify for a 3.5% down payment FHA insured home purchase loan.
Increasing Credit Scores To Get Best Mortgage Rates
However, homebuyers should try to optimize and get the highest credit score possible because lower credit scores mean tougher mortgage underwriting requirements and also means higher mortgage rates. Lenders view borrowers with lower credit scores as higher risk borrowers. Pricing adjustments or mortgage rates are higher for those with lower credit scores.
Mortgage Guidelines on Verification of Rent
Most mortgage companies will also require verification of rent by borrowers who have under 620 FICO Credit Scores. A verification of rent is only valid if the renter has been paying their rental payments with a check.
Verification of rent is only valid if the renter can provide twelve months of canceled checked to the lender. Need to have made 12 timely payments to the landlord. The landlord needs to complete a verification of rent form provided by the landlord. Cash monthly rent payments with a paid receipt does not count as rental verification.
Renters need to provide 12 months canceled checks that he or she has paid the landlord and needs to have been timely. One gap where the renter has paid the landlord with cash or partial check and partial cash will null and void the verification of rent.
Renting From Property Management Company
In lieu of canceled checks, the verification of rent can also be valid if the renter has been renting their home or apartment through a property management company.
Renters who have been renting from a registered property management company are exempt from providing 12 months of canceled checks to prove verification of rent. A verification of rent form provided by the lender completed by the property management company HOA manager, signed, and dated is sufficient.
The VOR form completed by the property manager of the property management company can be used in lieu of the 12 months canceled checks and/or bank statements of the renter.
Fixing Your Credit To Qualify For FHA Loan With High Debt-To-Income Ratio
Another correlation that credit scores have on FHA loans is the debt-to-income ratios required with credit scores under 620 FICO. HUD guidelines on debt-to-income ratios limits the maximum debt to income ratio to 43% DTI for Borrowers with credit scores of under 620 FICO credit scores.
The automated underwriting system normally will render an approve/eligible per AUS with high debt-to-income ratios if their credit scores are higher than 620 FICO. Not every time, but very often, borrowers with under 620 credit scores will often need a lower debt-to-income ratio to get an approve/eligible per automated underwriting system.
Borrowers with credit scores of 620 FICO or higher can go up to 46.9% front end and 56.9% DTI back end to get an approve/eligible per automated underwriting system. Mortgage rates on borrowers with credit scores of under 620 FICO are substantially higher than those with credit scores of higher than 620. To get the best mortgage rates, borrowers should have credit scores of higher than 640 FICO.
Fixing Your Credit To Qualify For FHA Loan Takes Time
Fixing your credit to qualify for FHA Loan does take time and cannot be done overnight. Simply by paying down all of your credit card balances to 20% of your credit card limits will maximize your credit scores. A fully maxed-out credit card will devastate your credit scores. Key is to have the most available credit limit available on all of your credit cards.
You can have prior bad credit and charge-offs that is older than 12 months but cannot have late payments in the past 12 months. Older collections and charge-offs does not have to be paid off and you can still qualify for a home loan as long as you have been timely in the past twelve months.
Make sure that you are not late with any monthly minimum payments. One late payment on your credit report will plummet your credit scores. Do not apply for new credit unless you absolutely have to. Each hard credit inquiry will drop your credit scores by 5 FICO points and sometimes even more. Do not co-sign for anyone because this will affect your debt to income ratios.
HUD Credit Dispute Guidelines on FHA Loans
Do not do any credit disputes on any derogatory credit items. HUD has strict guidelines on credit disputes during the mortgage process. Mortgage borrowers cannot have any credit disputes on non-medical collection accounts with balances that are a total outstanding balance of $1,000 or more.
Credit Disputes are not allowed during the mortgage process on non-medical collections, charge-offs, late payments, public records, bankruptcy, foreclosure, short sale, judgments, tax-liens, bad credit, and other derogatory credit tradelines. Credit disputes are allowed on medical collections, non-medical collection accounts and charge-offs with zero balance, and credit disputes on non-medical collections older than two years.
Borrowers cannot have any credit disputes on any charge offs during the mortgage approval process. Mortgage applicants are allowed to have credit disputes on medical collection accounts with outstanding unpaid balances as well as derogatory non-medical credit items with zero balances.
Fixing Your Credit To Qualify For FHA Loan With Credit Repair
Credit repair does work. There are many reputable credit repair consultants who I have personally witnessed delete negative derogatory credit items through police reports such as the following:
- outstanding collection accounts
- charge offs
- deed in lieu of foreclosures
- short sales
- late payments
- tax liens
- credit inquiries
- other derogatory credit items off a consumer’s credit report
If a consumer gets a police report for identity theft, they can get anything and every single derogatory credit tradelines removed from their credit report.
Risk With Credit Repair During Credit Repair
Hiring a credit repair consultant is an option a consumer has but can be very risky. Every credit repair company has a different price tag for their services. Credit repair can work. It can be extremely helpful in fixing your credit to qualify for FHA Loan for consumers with multiple derogatory tradelines.
It is perfectly fine to get late payments, bad credit, collections, and charge-offs removed from credit reports but not public records. All public records will get discovered when lenders do a third-party national public records search. Bankruptcies, foreclosures, judgments, short sales, tax liens, child support, and court records are all public records.
However, if a credit repair consultant removes public records such as bankruptcies, foreclosures, tax liens, child support, judgments, and other public records, mortgage companies will find out. This is because all lenders will use Data Verify and/or Lexis Nexis to do a third party public search on every borrower prior to closing.
Mortgage Case Scenario of Third-Party National Public Records Search
For example, here is a case scenario. Let’s say a borrower had a $100,000 judgment. A credit repair consultant who he or she hired had that judgment removed off all of the borrower’s three credit report. Now there are no signs of the borrower having a judgment. Unfortunately, the judgment will show up when lenders do a third party public records search through Lexis Nexis and/or Data Verify. That judgment needs to be addressed. Same with bankruptcies.
If you hire a credit repair consultant and the consultant repairs deletes bankruptcy, foreclosure, short sale, and public records from your credit report, it will be no use. Lenders run a third-party national records search where all public records will get discovered whether it is on credit report or not.
A savvy credit repair consultant can delete a bankruptcy or foreclosure off a borrower’s credit report through legal means. The bankruptcy and/or foreclosures will be totally off all of the borrower’s three credit reports. However, bankruptcies and foreclosures will appear when the third party vendor will do a third party public records search. So if a home buyer thinks that they can get the mandatory waiting period waived by just getting their bankruptcies and judgments removed off their credit report, they are wrong because the mortgage lender will find out.
Qualifying For FHA Home Loans With Bad Credit
Deleting outstanding collection accounts, charge off accounts, and late payments are no problem. This is because nobody can find out the removal of these negative derogatory credit items since they are not a public record. Consumers with bad credit who need to qualify for an FHA Loan, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at email@example.com.
Over 80% of our clients are borrowers who could not qualify at other lenders due to a last-minute mortgage loan denial or because of the lender overlays on government and conventional loans.
Gustan Cho Associates are mortgage brokers licensed in 48 states including Washington, DC, and Puerto Rico. We have a network of over 210 wholesale lending partners. The team at Gustan Cho Associates is available 7 days a week, weekends, evenings, and holidays to take your phone calls and answer all of your questions and assist you in fixing your credit to qualify for FHA Loan. I can also refer you to the best of the best credit repair consultants in the nation.
January 15, 2023 - 8 min read