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.
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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.
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
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 email@example.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:
- Loss of business
- Loss of employment
- Gap or gaps of employment
- Medical Issues
- Were victims of the Great Recession of 2008
- Other extenuating circumstances
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.
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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.
We can Help Homebuyers Re-Establishing Credit To Qualify For FHA Loan
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
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 firstname.lastname@example.org. 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
April 22, 2022 - 8 min read