Re-Establishing Credit To Qualify For FHA Loan

Re-Establishing Credit To Qualify For FHA Loan

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss re-establishing credit to qualify for FHA loan. Consumers who recently went through bankruptcy or foreclosure should seriously consider re-establishing credit as soon as possible. When should you start rebuilding your credit after bankruptcy? As soon as the bankruptcy has been discharged. The team at Gustan Cho Associates has helped countless folks get their credit scores over 700 FICO in less than one year after bankruptcy. Do not hire any credit repair companies. Credit repair can do more damage than good for people who are planning on qualifying for a mortgage after bankruptcy.

Table of contents "Click Here"

Stay Away From Credit Repair If You Are Planning on Applying For A Mortgage

You cannot have credit disputes during the mortgage process. Any non-exempt credit disputes need to be removed in order for the mortgage process to proceed. Credit disputes for the sake of taking a chance in getting derogatory credit tradelines removed without documentation can cause many hurdles and issues during the mortgage process. Credit disputes with solid documentation proving creditors made an error is fine. Lenders can do a rapid rescore with the three credit bureaus and correct consumer credit reports in three to five days if the errors are legitimate. Credit disputes without proper documentation can backfire on borrowers during the mortgage process.

Contact Us For Help In Re-Establishing Credit To Qualify For FHA Loan

Impact Of Bankruptcy And Foreclosure On Consumer Credit Scores

Consumer credit scores will definitely drop by more than 150 plus points after bankruptcy or foreclosure on the credit report. The good news is that the sudden massive drop in credit score is just temporary. Scores will eventually go up as time passes. It might take a long time but it will naturally go up as bankruptcy and/or foreclosure ages.

The Best Way of Re-Establishing Credit To Qualify For FHA Loan By Adding New Credit

Adding positive credit such as three secured credit cards will expedite boosting credit scores. After a few years, although bankruptcy and/or foreclosure record remains on the credit record, it will have little or no impact on scores. For homebuyers planning to buy a home in a few years, it is recommended they start re-establishing credit to qualify for FHA loan. They should start re-establishing credit to qualify for FHA loan right away after filing bankruptcy and/or foreclosure. In this article, we will cover and discuss re-establishing credit to qualify for FHA loan after bankruptcy.

Re-Establishing Credit To Qualify For FHA Loan To Prepare For Home Purchase

For homebuyers who are planning on getting a residential mortgage loan in the near future, here are some tips and advice. At least 3 to 5 credit tradelines such as credit cards and/or installment loans that have been established for at least a year. No late payments after a bankruptcy or foreclosure. Late payments after bankruptcy and/or a housing event is really frowned upon by lenders. Lenders classify borrowers with late payments after bankruptcy and/or foreclosure as second offenders and will not want anything to do with them. Verification of rental income. Make sure when to pay rent payments with a check and never cash. When it comes to applying for a mortgage, the lender will ask for 12 months of canceled checks and/or bank statements. No overdrafts or bounced checks in the past 12 months.

Quickest Method Of Re-Establishing Credit To Qualify For FHA Loan

The quickest way of re-establishing your credit is not by hiring a credit repair company, but by establishing new credit via the use of secured credit cards. Getting an unsecured credit card after a bankruptcy and/or foreclosure will be next to impossible to get approved. However, getting up to secured credit cards will definitely boost credit scores. Three secured credit cards are the optimal number with at least a $500 credit limit. Anything over three credit cards will not have more effect. Each secured credit should boost credit scores by at least 20 to 30 points for a total of 60 to 90 points with three secured credit cards.

Secured Credit Cards To Improve Credit

Secured Credit Cards To Improve Credit

For consumers who are timely with three secured credit card payments for six months to a year, the secured credit card companies will raise credit limits without having an additional deposit. After a year of having a timely historical payment history, consumers will be able to apply for unsecured credit cards.

Hiring Credit Repair Companies Can Backfire During The Mortgage Process

Consumers can also hire credit repair companies to help repair credit and improve credit scores. However, many times, credit repair companies are not needed: This is because as derogatory credit ages, it has no impact on credit scores. All derogatory information on the credit report will remain on the credit report for a period of 7 years. As time ages, the derogatory information will have less impact on scores. However, the negative item will remain on the credit report for 7 years from the date of the last activity. Anyone can repair their own credit. Those who do not have the time to tackle such tasks can hire a credit repair company to dispute the errors on their credit report. Credit disputes during the mortgage process are prohibited. Older derogatory information from their credit reports has less impact on credit scores.

Do Not Dispute Any Derogatory Credit Tradelines Prior To The Mortgage Process

Borrowers do not have to pay off outstanding collections and charge off accounts to qualify for FHA Loans. Home Buyers who need to qualify for FHA Loans with bad credit with a lender with no lender overlays, please contact us at 1-800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates are experts in helping borrowers rebuild and re-establish credit after bankruptcy and/or a housing event. The team at Gustan Cho Associates has helped countless folks get credit scores over 700 FICO in less than one year after bankruptcy.

Re-Establishing Credit To Qualify For FHA Loan With Secured Credit Cards

Qualifying for a home loan is not as difficult as many people think. Most homebuyers think that they need a large down payment and good credit in order to qualify for a mortgage loan. Lenders do realize that many folks may have gone through periods of hardship due to the following:

FHA And VA Mortgages For Home Buyers

The best loan programs for homebuyers who had prior credit issues are FHA and VA Loans. Unfortunately, not everyone can qualify for VA Loans. VA Home Loans are restricted to veterans of the U.S. Military with a valid Certificate Of Eligibility. You do not have to pay outstanding collections and charge off accounts to qualify for FHA Loans. However, lenders do want to see re-established credit to qualify for a mortgage by borrowers.

Ways Of Re-Establishing Credit To Qualify For FHA Loan

In order to establish good credit to get good mortgage rates and interest rates on terms of credit cards, automobile loans, and other installment loans, you need a good credit history.  If you have no credit history at all, it is easy to reestablish your credit. Opening a bank account is the simplest and safest way to manage your finances. By opening a savings account or a checking account, consumers can build good credit by saving money and earning interest. Easily paying bills and tracking expenses on time. Responsible use of a checking account or an Automatic Teller Machine (ATM) card will reflect favorably in the credit report. If you had prior bad credit, opening a bank account would be a great way of re-establishing credit. If consumers have services in their name (telephone, gas, and electric), make sure to pay them in full and on time. Pay any loans and credit accounts on time each month. At least pay the minimum, if there is one. This will be another way of reestablishing credit.

Tips On Re-Establishing Credit To Qualify For FHA Loan After Bankruptcy & Foreclosure

Re-establishing credit to qualify for a mortgage after bankruptcy and/or foreclosure can be done. The best way of re-establishing credit after bankruptcy or foreclosure is by getting 3 secured credit cards with $500 credit limits. Each secured credit card can boost credit scores by 30 points. So 3 credit cards with $10 balances can substantially increase one’s credit scores. Applying for credit cards and using it responsibly can help build a good credit history. Borrowers who have been denied credit cards in the past may want to investigate getting secured credit cards. They deposit a pre-determined amount of money in with the credit card provider. The secured card can be used the same way as a regular unsecured credit card with the same convenience and payment flexibility. Gasoline companies and retail stores also offer their own credit cards.

FHA Loans With Bad Credit

Borrowers can qualify for FHA loans with bad credit. However, lenders want to see that borrowers have re-established their credit. Borrowers do not have to pay off collections and charge-offs to qualify for FHA loans. Here are the basic FHA loan requirements:

  • Minimum 580 credit scores
  • Outstanding Collections and Charged Off Accounts do not have to be paid to qualify for FHA loans
  • 3.5% down payment
  • Borrowers can qualify for FHA loans two years after Chapter 7 Bankruptcy discharged date
  • Borrowers can qualify for FHA loans three years after a deed in lieu of foreclosure, short sale, and/or foreclosure
  • Lenders want to see re-established credit after bankruptcy and/or foreclosure

Gustan Cho Associates Will Help You Re-Establishing Credit To Qualify For FHA Loan

Credit Disputes During Mortgage Application Process

A loan officer should not issue a pre-approval letter to borrowers if they have credit disputes during the mortgage application process. Here are FHA Guidelines On Credit Disputes. HUD does not allow credit disputes on any non-medical collection accounts with aggregate outstanding balances of $1,000 or more. Credit disputes on a non-medical collection account less than $1,000 on one’s credit report and zero balance disputes are allowed. Credit disputes on medical collection accounts with outstanding balances are exempt and can be disputed. Credit disputes on charge-off accounts are not allowed. Must be retracted to for the mortgage process to proceed under HUD Guidelines.

Need Help in Re-Establishing Credit To Qualify For FHA Loan?

Re-Establishing Credit To Qualify For FHA Loan With Collections And Charge Off Accounts

HUD does not require outstanding and collection accounts with outstanding balances to be paid off. Many lenders require collections and charge off accounts to be paid off in order for borrowers to qualify for FHA loans. This is not a HUD Guideline but a lender overlay on the individual lender. If a lender requires borrowers to have collections and/or charge offs to be paid, contact us at Gustan Cho Associates. We do not have any FHA Lender Overlays and will just go off HUD Guidelines On Collections and Charge Off Accounts.

Re-Establishing Credit To Qualify For FHA Loan With Non-Medical Collections

There is one rule with non-medical collections. If borrowers have non-medical collections with over $2,000 aggregate outstanding balance, HUD requires the following:

  • the underwriter to take 5% of the outstanding balance of all collections
  • use it in the calculations of the borrower’s debt to income ratio

Borrowers do not have to pay this amount:

  • it is rather just used for qualifying income and used as a monthly debt

Re-Establishing Credit For Home Purchase With Low Credit Scores

As I expressed in the points above, at my lowest I was at a 570 score.

  • This was the low of the low as I had a bankruptcy and foreclosure on my record (which can stay on record for up to 10 years), as well as credit card and vehicle loans removed as well
  • I paid the ultimate price for what I did and now I had a large hole to dig myself out of
  • I was asking myself, how am I ever going to get my score back to something respectable? 
  • The answer didn’t take too long to show up at my door

I received a credit card application in the mail and I bet you are wondering how I got this after just getting credit card debt remove via bankruptcy?

Re-Establishing Credit For Home Purchase And Using Credit Cards

The importance of restoring credit for buying a home and using credit cards

Well, the answer is simple:

  • Credit card companies know you can’t declare Chapter 7 Bankruptcy again for another 8 years so by hook or crook, customers will be stuck with the debt they choose to take on during the time frame
  • Well after applying for the card, it was mine and soon I was back to using credit cards again
  • This time around I only spent what I knew I could pay off and made sure I paid it off monthly so I can start building up some positive payment history again
  • The next thing that I did was in 2012 I leased a new car with a cosigner so once again I was making timely payments on a monthly basis and getting that positive credit history built up
  • The big step came in 2014 when I purchased my home through the FHA Back to Work program
  • I had 650 credit score at the time and I had no issues securing this loan all by myself

After I made all 36 payments on my lease, I returned the vehicle and went to a different dealer where I purchased our family a minivan and financed it without a cosigner and obtained a used car loan at 3.24%.

Home Purchase With Credit After Bankruptcy

I came a long way from damaged credit to where I am today so I can speak from experience when I say that it is a tough uphill battle to climb.

  • Be warned that you will get rejected along the way, as few people will want to extend you credit shortly after a bankruptcy/foreclosure
  • However, if you take baby steps, you will build that credit back up again
  • It isn’t the end of the world to have damaged credit, in fact it is way more normal than you think
  • Some people just run into circumstances where hitting the reset button so to speak is the best path for them
  • This isn’t a “Get out of Jail Free” card as you need to change your habits once receiving this break in your life
  • Use these lessons to make smarter financial decisions in the future
  • There is no doubt in my mind that in the coming years I will be back up over 700 yet again

But to this day I am still thinking about every choice and decision I make on a daily basis.

Credit Repair Versus Re-Establishing Credit

Credit repair is the task of removing derogatory, negative, and/or inaccurate information from the credit reports by credit dispute.

  • There is a big difference between credit repair and re-establishing credit
  • Re-Establishing Credit By Adding New Credit is the best way to get ready to qualify for a mortgage

Credit Repair and Re-Establishing Credit By Adding New Credit can be done at the same time.

  • The older negative credit items are the less impact it has on credit scores
  • Removing old negative items will not necessarily improve credit scores
  • But credit report will look cleaner and will give creditors a better first impression

Credit repair can boost credit scores if a recent negative or inaccurate item falls off the credit report.

Secured Credit Cards In Re-Establishing Credit

Re-Establishing Credit By Adding New Credit with secured credit cards is the easiest and quickest way of improving credit scores.

  • Lenders want to see re-established credit for at least a year for them to feel comfortable in approving a mortgage loan
  • Lenders do not want to see any late payments after a bankruptcy and/or foreclosure
  • Most lenders will have credit tradeline requirements as part of their lender overlays
  • Lenders will require a minimum of three re-established credit items on credit report for mortgage loan approval as part of their overlays
  • Credit Tradelines requirements are lender overlays

Gustan Cho Associates does not have any overlays and just go off Automated Underwriting System findings.

Re-Establishing After Bankruptcy

A bankruptcy can plummet credit scores by 200 points or more. Foreclosures, Deed In Lieu Of Foreclosures, and Short Sales can drop scores by 150 points or more.

  • So how does one go about Re-Establishing Credit By Adding New Credit after filing bankruptcy or foreclosure?  
  • It is extremely difficult to get new credit when scores are below 600 FICO
  • The chances are that credit scores will be below 500 FICO after bankruptcy or foreclosure is reported to the three major credit reporting agencies
  • The best way for you to go about Re-Establishing Credit By Adding New Credit after a bankruptcy or foreclosure is to get 3 to 5 secured credit cards

Each secured credit card should have a $500 credit limit for maximum effect.

Power Of Secured Credit Cards

Each secured credit card will boost credit scores by at least 20 points or more depending on the borrower.

  • Secured Credit Cards are just like unsecured cards and report on credit bureaus
  • The only difference with secured credit cards is that the cardholder needs to put a deposit
  • The secured credit card company will issue a line of credit on the card equivalent to the amount of deposit
  • Secured Card Companies will report the consumer payment history on all credit reporting agencies

Any payment 30 days late will be reported as a late payment.

Increasing Credit Limits On Secured Credit Cards Boosts Scores

As the secured card ages, the secured card company will increase credit limit without the cardholder putting any more deposit.

  • With regular use of secured credit cards, credit scores will improve because part of the credit score calculations is the length of credit history
  • Another good news is that credit scores will slowly, but surely, increase as bankruptcy or foreclosure ages
  • Re-establishing credit is a long but rewarding process
  • There are many cases where consumers have credit scores as high as 700 plus one-year after bankruptcy, short sale, deed in lieu, foreclosure with secured credit cards

Secured Credit Card companies will increase credit limit without cardholder putting any more deposit as the card ages with no late payments.

Late Payment On Credit Report

Never be late on any monthly credit payments while re-establishing credit and/or going through a credit repair program.

  • One late payment will drop credit scores by at least 80 points
  • Any payment that is not paid within 30 days of the due date is considered a late payment
  • Late payments stay on credit report for 7 years

With the combination of credit repair and re-establishing credit, consumers will be on the road to good credit in about a year.

Credit Disputes During The Mortgage Process

Credit Disputes are not allowed during the mortgage process.

  • Medical Credit Disputes and non-medical credit disputes with zero balances are exempt
  • Non-Medical collections credit disputes are exempt if the total outstanding balances is less than $1,000
  • One cannot have credit disputes on charged off accounts in the mortgage process
  • Retracting credit disputes will drop credit scores
  • Reason credit disputes are not allowed is because the credit bureaus automatically discount the derogatory disputed item from the credit scoring formula
  • So, if a consumer disputes a collection or charge-off account, the credit bureaus will disregard that negative scoring from the credit scoring model
  • This makes consumer credit scores jump with disputes
  • On the flip side, retracting credit disputes will put the derogatory item back on the credit scoring formula, therefore, dropping the credit scores

Whatever a credit repair company does, one can do it themselves. Contact us at Gustan Cho Associates Mortgage Group for free tips in re-establishing credit to qualify for a mortgage. Our team of mortgage professionals can be your one stop shop credit repair and credit consulting shop. We help consumers with many do-it-yourself information on credit repair and re-establishing your credit.

Qualifying For FHA Loans With Bad Credit

FHA Loans is the best mortgage loan program with home buyers with bad credit.

  • Minimum credit scores required for 3.5% down payment FHA Loan is 580 FICO
  • Outstanding Collections and Charge Off Accounts do not have to be paid to qualify for FHA Loans
  • However, to get an approve/eligible per Automated Underwriting System borrowers to need to be timely in the past 12 months
  • Two-year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Loans
  • Mortgage loan applicants in a Chapter 13 Bankruptcy repayment plan can qualify for FHA Loans if they are one year into the Chapter 13 Bankruptcy
  • There is no waiting period after Chapter 13 Bankruptcy discharged date

Mortgage Borrowers with any questions please contact us at Gustan Cho Associates at 1-800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

Qualify and Get Pre-Approved Today For an FHA Loan

If the 5% of the outstanding non-medical collection account will go over the maximum debt to income ratio requirements to qualify for an FHA loan, borrowers can enter into a written payment agreement with the creditor. Whatever the monthly payment is agreed upon, that number will be used in lieu of the 5%. Borrowers needing to qualify for a mortgage with a direct lender with no overlays on government and conventional loans can contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and on holidays.

Contact Us For Help in Re-Establishing Credit To Qualify For FHA Loan

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *