Tips On Improving Your Credit Scores To Qualify For Mortgage

Advice On Improving Your Credit Scores To Qualify For Mortgage Was Updated On May 2, 2017

If you have had credit problems, be prepared to discuss them honestly with a mortgage professional.  HUD, the parent of FHA, realizes that there can be extenuating circumstances in people’s lives and does not penalize potential home buyers 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 home ownership by insuring loans originated by private lenders such as banks and mortgage companies in the event if the borrower defaults on their FHA insured mortgage loans.

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 which are higher standards than those of HUD GUIDELINES

Here are 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, home buyers 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 FICO credit scores
  • Borrowers with under 580 credit scores can qualify for FHA Loans but need 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 is allowed
  • 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 for FHA Loans
  • If borrower had mortgage part of Chapter 7 Bankruptcy, 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 and 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
  • Maximum back end debt to income ratio cannot exceed 56.9% DTI and 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 credit scores

Improving Your Credit Scores To Qualify For Mortgage Because Of High Debt To Income Ratios

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

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.

Home buyers need to be religious on 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 has 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 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 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

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

  • For maximum credit score optimization, three to four 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 FICO credit scores one year a bankruptcy and/or foreclosure.
  • If consumers has 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 that have FHA Lender Overlays on minimum credit tradelines required and some require that the credit tradelines has 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 is worth its weigh 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 means lower mortgage interest rates and better terms. Lenders feel more secure with borrowers with higher credit scores.

TIP: Users can sign up on FreeCreditClick.com 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, a daily credit monitoring and alerts as well as their scores delivered to them in minutes!

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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