Improving Your Credit Scores To Qualify For Mortgage

Can I Qualify For A Mortgage With Bad Credit And Lower Credit Scores?

This Article Is About Advice On Improving Your Credit Scores To Qualify For Mortgage

Can I Qualify For A Mortgage With Bad Credit And Lower Credit Scores? You do not need to pay outstanding collection accounts and/or charged-off accounts to qualify for an owner-occupant home mortgage. You can have lower credit scores to qualify for a government and/or conventional loan. However, you do need to meet the minimum credit score requirement on government and conventional loans. Fannie Mae and Freddie Mac require a 620 minimum credit score requirement to qualify for a conventional loan. To qualify for a 3.5% down payment FHA loan, HUD (the parent of FHA) requires 580 credit scores. However, HUD allows borrowers with under a 580 credit score and down to a 500 FICO to qualify for an FHA loan as long as the borrower can get an approve/eligible per automated underwriting system. The key in getting an approve/eligible per automated underwriting system (AUS) is for the borrower to have been timely in the past 12 months. All manual underwrites require timely payments in the past 24 months. Borrowers can get an approve/eligible per automated underwriting system with one or two late payments in the past 12 months. In this article, we will discuss and cover how to improve your credit and increase your credit scores so you can get an approve/eligible per automated underwriting system.

Qualifying For A Mortgage With Bad Credit

Borrowers can get qualified for a mortgage with prior bad credit and lower credit scores. If you have had credit problems, be prepared to discuss them honestly with a mortgage professional.

  • HUD is the parent of FHA
  • HUD realizes that there can be extenuating circumstances in people’s lives
  • HUD does not penalize potential homebuyers who have had prior credit issues and has re-established themselves
  • FHA is not a lender and does not fund FHA Loans
  • The role of the Federal Housing Administration is to promote homeownership by insuring loans originated by private lenders such as banks and mortgage companies in the event if the borrower defaults on their FHA Loans
  • This also holds true with Fannie Mae and Freddie Mac on conventional loans
  • You can qualify for a conventional loan with outstanding collections and/or charged-off accounts

In order for FHA to insure defaulted FHA Loans, the lender needs to be meet the following requirements

The bank and/or lender needs to:

  1. Be FHA Approved
  2. The borrower needs to meet FHA Guidelines
  3. Lenders can have their own FHA Lender Overlays
  4. Overlays are higher standards than those of HUD GUIDELINES

Main Reasons Consumers Have Bad Credit

Here are the reasons why people have bad credit:

  • Unemployment
  • Medical issues 
  • Divorce
  • Loss of business

There are other reasons why consumer’s credit took a turn for the worse besides the reasons above.

  • Nobody has intent on not paying their bills
  • However, if there is a gap of income stream coming in, the consumer cannot make the minimum required monthly payments and due to that their credit suffers
  • However, homebuyers can qualify for FHA Loans after one year of timely payments

HUD Guidelines To Qualify For FHA Home Mortgage

Here are HUD’s Guidelines on the qualification requirements to qualify for FHA LOANS:

  • Minimum of 580 credit scores
  • Borrowers with under 580 credit scores and down to a 500 FICO can qualify for FHA Loans
  • Any borrowers with under a 580 credit score need a 10% down payment
  • Borrowers do not have to pay off outstanding collection accounts
  • Charge off accounts do not have to be paid off
  • HUD requires on-time payments for the past 12 months
  • No mortgage late payments in the past 12 months
  • One 30-day late payment in the past 12 months is allowed

HUD Guidelines On Bankruptcy And Housing Events

What are the HUD guidelines for bankruptcy and housing events

2 year waiting period after Chapter 7 Bankruptcy discharged date:

  • Borrowers can qualify for FHA Loans one year into Chapter 13 Bankruptcy repayment plan
  • Three-year waiting period after foreclosure, deed in lieu of foreclosure, short sale to qualify

If the borrower had mortgage part of Chapter 7 Bankruptcy, there is a three-year waiting period after the foreclosure, short sale, or deed in lieu was finalized after the Chapter 7 Bankruptcy:

With conventional loans, the waiting period is 4 years from the discharged date of Chapter 7 Bankruptcy:

  • The recorded date of the foreclosure, deed in lieu or short sale date does not matter.
  • However, the deed in lieu, foreclosure, short sale needs to be finalized
  • Max debt to income ratio on conventional loans is capped at 50% DTI

FHA Maximum back end debt to income ratio cannot exceed 56.9% DTI:

  • front end DTI cannot exceed 46.9% DTI to get an approve/eligible per AUS FINDINGS. 
  • Maximum DTI is capped at 43% DTI for borrowers with under 620 FICO

Improving Your Credit Scores To Qualify For Mortgage Due To High DTI

Borrowers with bad credit can reduce monthly payment debt if they have a higher debt to income ratio. Car payments and student loan payments are the biggest barriers for borrowers with high DTI. Borrowers with high debt to income ratios can sell their car or trade it in for another car that has a lower monthly auto payment. The car can be more expensive which does not matter but the matter of the monthly payment does matter when calculating debt to income ratios.

Make Payments On Time Is Best Guarantee In Improving Your Credit Scores To Qualify For Mortgage

Borrowers can qualify for FHA Loans with prior bad credit, outstanding collections, past late payments, and charge-offs. However, most lenders want to see timely payments in the past 12 months. Late payments after bankruptcy and foreclosure can be the kiss of death. But not always a deal killer at Gustan Cho Associates. As long as we can get an approve/eligible per Automated Underwriting System, we can approve and close the loan. Homebuyers need to be religious in making their monthly payments on time because scrutiny is based on the last 12 months’ payment history.

Never Close Out Revolving Credit Account

Improving Your Credit Scores To Qualify For Mortgage can be done by adding revolving accounts. Many consumers will never get a credit card or use credit after bankruptcy and foreclosure. This is not recommended and no credit or active revolving accounts is one of the main reasons for low credit scores. The minute consumers have a bankruptcy discharge, they should get three to five secured credit cards. Credit cards are the easiest and fastest way of re-establishing credit after bankruptcy and/or foreclosure. Remember never to be late on any monthly debt payment after bankruptcy and/or foreclosure. There are lenders that WILL NOT extend credit to anyone who has filed bankruptcy and/or had a foreclosure. Many people are proud that they do not have any credit cards and whatever they purchase, they buy it cash. This is not a good policy and hurts the individual because they will not get higher credit scores and established credit tradelines.

Credit Cards In Improving Your Credit Scores To Qualify For Mortgage

Do credit cards improve your credit scores in order to qualify for a mortgage

Credit cards are the best tool to use to boost one’s credit scores and establish credit.

  • For maximum credit score optimization, three to five secured credit cards with at least $500 credit limits is necessary
  • The sooner borrowers get their secured credit cards, the sooner they are on their way to great credit
  • There are many instances where consumers have 700 credit scores one year a bankruptcy and/or foreclosure
  • If consumers have older credit cards such as a JC PENNY, KOHLS, BEST BUY, GAS CARD and is still active, never close out the aged credit cards
  • The older the credit card is, the stronger the borrower’s credit profile is
  • There are many lenders with Overlays on minimum credit tradelines required
  • Some require that the credit tradelines have been opened for more than 24 months while others may require 36 months
  • Consumers do not have to use their credit cards
  • Just have them and pay their annual fees

Those aged credit tradelines are worth their weight in gold.

Credit Cards For Improving Your Credit Scores To Qualify For Mortgage

Having low credit card balances is the best and fastest way of Improving Your Credit Scores To Qualify For Mortgage

  • Consumers should not have greater than 10% of outstanding balance to their credit limit
  • Consumers with maxed-out credit scores will have their credit scores plummet
  • Paying down credit card balances to 10% or lower balance to credit limit is the best way of Improving Your Credit Scores To Qualify For Mortgage
  • High credit scores mean lower mortgage interest rates and better terms
  • Lenders feel more secure with borrowers with higher credit scores

TIP: Users can sign up on for a free 7-day trial to get their overall credit scores from all 3 credit bureaus! They gain unlimited access to their credit scores, daily credit monitoring, and alerts as well as their scores delivered to them in minutes!


  1. Arlene Miller says

    Good Morning. I am preparing to purchase my first home this summer. I am a veteran and will be applying for a VA loan. I’m trying to get clarity as it applies to your guidelines on student loan exemptions into the debt to income factor.
    I have students loans that were initially on the IDR repayment plans that went into deferment status back in August 2019; Then of course COVID happened in 2020 with the federal postponing of all payments. My loans have now been in defer/forbearance status almost 2 years.
    When I apply for a VA loan will my student loan balance be exempt from inclusion in the DTI calculations?

    Kind regards,

    Arlene Miller

  2. Arlene Miller says

    I am in Texas, looking to purchase in Collin County.

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