What role does your credit score play in obtaining a FHA loan?
The FHA officially has no minimum FICO score requirement but the banks who lend the actual money have. Currently it is 640. There are ways to increase your score if you trying to qualify for an FHA loan.
The easiest way to raise your score quickly is to pay down your credit card balances. If you can bring them down to less than 30% of the credit limit your scores will shoot right up. Credit reports often have incorrect information. If you can document that a reported outstanding collection has already been paid or that other derogatory line items are incorrect you can often get the information deleted or ignored. In many cases debt collectors will accept 40% of an outstanding debt as payment in full.
When the number and size of collections aren’t overwhelming simply settling with the collector and getting paperwork to prove it is often the best approach. When someone’s credit history is especially beat up with old late payments, collections, bankruptcies, etc. being reported, the fastest way to get qualified for an FHA loan is often to work with a credit optimization specialist. There will be a monthly charge for this service, but working with a credit optimization specialist is often the only route to take for people with hammered credit histories but who need to refinance in the next six months.
Keep in mind that using such a service only works if you are able to make all of your current payments over the period you are working on your credit. If you are dealing with a loss in income and are currently behind on your monthly mortgage or other obligations sometimes a credit counseling company is the best bet. Working with such a firm can be a great way to get back on one’s feet financially. Typically they charge something between $40-50 per month. Be aware that going this route means that borrowers must make the credit counseling payments on time for a full year before qualifying for an FHA loan.
A credit score is also known as a FICO score. When you are applying for a home loan the banks that fund FHA loans require a credit check and they use what is called your “middle score” when determining your credit worthiness. There are three major credit bureaus in the US — Experian, Equifax, and TransUnion — and lenders require that your credit report be pulled at all three bureaus when you apply for a loan. A credit report that includes all three bureaus is called a tri-merge credit report. Determining your middle score is simpler than you might imagine; it simply means discarding the high score and the low score and using the middle score on a tri-merge credit report.
Besides your score there are some other credit issues that will disqualify you from getting a regular FHA Loan. If you have any of the following chances are a FHA loan is not for you.
- A chapter 7 bankruptcy in the last two years
- A foreclosure in the last three years
- A chapter 13 bankruptcy in the last 12 months
- Unpaid tax liens, judgments, or non-medical collections (Some medical collections are acceptable but non-medical collections must be settled/paid off)
- Recent 30-day+ late payments on mortgages, credit cards, or other obligations (if it looks like you are living beyond your means currently you likely won’t qualify for an FHA loan until you can get 6+ months of on time payments on your obligations).
If you would like to find out more about your qualifying for an FHA loan please contact us – we get documents to title in 10 days – Guaranteed!
