Government Loans, FHA, FHA 203K, FHA 203, FHA Streamlines, VA, Reverse Mortgage, Manufactured Homes, New Purchase
FHA loans provide great assistance to many first time home buyers by offering mortgage loans with lower down payments. While this is a benefit for many people, recent changes in policy may have put the loans just out of reach for some would-be homeowners with questionable credit history.
Home buyers looking to take advantage of great FHA loan benefits should already know they need to establish the best possible credit rating. Applicants with a better credit rating increase their options for mortgage or refinance loans. In order to qualify for the low 3.5 percent FHA loan down payment, applicants will need a FICO score of at least 580. Those that don't meet that criteria will have to put a down payment of 10 percent on the mortgage they want.
While FHA loans are known as a great service for people looking for help buying a house, applicants can make the process even easier if they take steps toward ensuring their credit history is in tip-top shape. The agency advises prospective home buyers to approach FHA loans with their best possible credit history to eliminate any potential risk of not qualifying.
When the Federal Housing Administration announced rule changes to help strengthen finances and protect against risk, one of the biggest changes was requiring a minimum FICO score of 580 to qualify for the attractive 3.5 percent down payment on mortgage loans.
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FREE CREDIT REPORT
FREE CREDIT REPORT
FreddieMac Credit Smart
What FHA Lenders Want to See When They Review Your Credit
Before approving a loan, the lender analyzes the integrity of the borrower's past credit performance. Based on FHA requirements, those who have a good credit history demonstrated by a solid track record of timely payments will likely be eligible for a loan. Potential borrower's whose credit history is marred by slow payments, poor financial judgment and delinquent accounts is not a good candidate for loan approval.
The following is a list of items concerning the borrower's credit:
NO CREDIT HISTORY
Two lines of credit are necessary to apply for an FHA loan. However, in the event a borrower does not have sufficient credit on their credit report the FHA will allow substitute forms.
CHAPTER 13 BANKRUPTCY
FHA will consider appoving a borrower who is still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The court trustee's written approval will also be needed in order to proceed with the loan. The borrower will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.
CHAPTER 7 BANKRUPTCY
At least two years must have elapsed since the discharge date of the borrower and / or spouse's Chapter 7 Bankruptcy, according to FHA guidelines. This is not to be confused with the bankruptcy filing date. A full explanation will be required with the loan application. In order to qualify for an FHA loan, the borrower must qualify financially, have re-established good credit, and have a stable job.
LATE PAYMENTS
During an underwriter analysis of borrower credit, the overall pattern of credit behavior is being reviewed rather than isolated cases of slow payments. If a good payment pattern has been maintained, regardless of a specific perod of financial difficulty preceded it, the borrower may escape disqualification.
FORECLOSURE
FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. However, if the foreclosure of the borrower's main residence was the result of extenuating circumstances, an exception may be granted if they have since established good credit. This does not include the inability to sell a home when transferring from one area to another.
COLLECTIONS, JUDGEMENTS AND FEDERAL DEBTS
A collection is minor in nature usually does not need to be paid off as a condition for loan approval. It is stated as such in FHA guidelines. Any judgments will have to be paid in full prior to closing. Borrowers who are delinquent on any federal debt, such as tax liens, student loans, etc., are not eligible.
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Non-Traditional Credit
Non Traditional Credit vs. Insufficient Credit
- Nontraditional Credit Borrowers
Borrowers with insufficient trade lines to merit a fico score. May also be used to augment “thin-files” or files where a credit score was generated based on just a few tradelines.
Nontraditional credit reports may not be used to enhance any poor credit history on a traditional credit report.
- Insufficient Credit Borrowers
Borrowers with no credit references, or borrower’s who only have non-preferred references (see Group 2 references on next slide)
Non Traditional Credit - Borrowers w/ No Fico Scores or Limited
Tradelines
- Provide at least three (3) credit references rated at least 12 months. At least 1 reference must be from Group 1 (G1 references should be exhausted before using G2 as G1 is more indicative of a borrower’s future housing payment performance.)
- Borrower’s with NO G1 references will be looked at as Insufficient Credit borrowers:
Group 1: Rental Housing Payment or Utilities (Gas, Electricity, Water, Land line home phone, cable TV). If renting from family member , provide cancelled checks for documentation.
Group 2: Insurance coverage (Auto, medical, life, renters), Cell Phone, Internet services, Child Care payments, School Tuition, Retail Stores (Department, Furniture, Appliances, Specialty Stores, Rent-to-Own), 12 month savings by regular deposits with NO NSF’s, Auto leases, Personal loan, Storage Units, etc.
- Prefer using verification through Credit Bureaus using Nontraditional Mortgage Credit Report (NTMCR). If NTMCR is impractical or unavailable, obtain independent verification of trade references. Use public records from state, county or city records. Use published address or telephone number for that provider/creditor – don’t rely solely on information provided by the applicants
- Provide landlord information such as Name, Phone number to verify rental history.
- All references from individuals should be backed up with most recent 12 months cancelled checks.
- All references from individuals should be backed up with most recent 12 months cancelled checks.
- Rental references from management companies may be used in lieu of 12 months cancelled checks.
- Various service providers now available who develop bill payment history as well as scoring – FHA allows it for borrowers with no or little traditional credit.
Evaluating Non Traditional Credit Borrowers
- A satisfactory credit history, at least 12 months in duration includes:
No history of delinquency on rental housing payments and other credits in last 12 months No collection accounts / court records reporting (other than medical) filed within the past 12 monthsEvaluating Insufficient Credit Borrower’s (Borrower’s w/No Credit References or having only tradelines shown on item #2 from previous slide):
- No collection accounts / court records reporting (other than medical) filed within the past 12 months
- Max DTI of 31/43% from owner occupant borrower’s only – Comp factors are not applicable for borrowers with insufficient credit - NO EXCEPTION
- 2 months PITI from own funds after closing – Gift Funds not allowed as reserves
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FHA CONNECTION.US
Government Loans - FHA - VA Purchase and Refinance Loan Programs
