You credit history is a major part of applying for an FHA Loan and getting approved. Credit history along with your gross income and job history are the three major factors with getting approved for a FHA Loan. In this post I’m going to briefly discuss some of the major credit factors I’ve seen lately affecting borrower’s ability to get a FHA Loan
Credit score
Everyone gets scored by the three credit bureau’s Experian, Equifax and Trans Union. Mortgage lenders throw out the high and low and look at the middle score. Today it is best to have a score above 620, even better 660, to qualify and have a smooth closing with an FHA Loan. However you can have below a 620 score and still qualify, it might just take some extra work and documentation. There is a LOT that goes into the credit scoring system, but I will just summarize briefly the main things you want to do to keep a high score:
- Never be late on any debt obligations that show on your credit such as credit cards, student loans, home loans, auto loans, etc… If you have to be late on something, make it your phone bill, utilities, etc… because they don’t report to the credit bureaus. But be obsessive about paying items that report to the bureaus on time and check your credit periodically to make sure a mistake hasn’t been made. Late payments severely damage your score.
- Make sure your revolving accounts have balances that are 30% or less than the credit limit. Better to have 3 cards each with 30% balances then one maxed out card.
- Even if you have perfect credit, you must be using credit in order to have credit scores. So even if you carry no debt, you may want to use a credit card and then pay it off immediately just so something is reporting to the bureaus.
Bankruptcies and Foreclosures
Unless you have extenuating circumstances (which truly extenuating circumstances are rare and need to be fully documented), to qualify for an FHA Loan you have to wait 1 year from a BK 13, 2 years from a BK 7 discharge and 3 years from a foreclosure sale date. With a BK 13 you have to have made all your payments on time. With a BK 7 you need to have re-established credit and have NO late payments since the BK.
Collections
A lot of people applying for FHA Loans have old collections on their credit report they may have forgotten about. There is no hard and fast rule about collections; many times it is up to the underwriter what is acceptable. Generally medical collections are OK if under $5,000. And other collections are OK if less than $1,000 in total. Otherwise they will have to be paid off prior to closing on a FHA Loan. But DO NOT pay off collections until right before you close. Because paying them off can drastically lower you score because it updates the account to the bureaus.
Judgments
Judgments will all need to be paid off prior to close. The only exception is if you have a payment plan set up with the IRS to pay off tax liens and the IRS or state is willing to subordinate to a new first mortgage. Again, don’t pay off until right before close. Work with your loan officer on timing the pay off.
General late payments
There is no exact rule on late payments on credit cards, installment loans and mortgage loans. Generally, mortgage lates are looked at the most seriously. You will need a major letter of explanation and you will probably need 12 months to have elapsed since the late payment. Credit card and installment lates that have been within the last 2 years will be examined by the underwriter and you will need to provide a letter of explanation. The longer the time since the late payments, the less effect they will have on your score and the underwriter’s decision to approve you.
There’s a lot more but those are the basics you need to know. Credit is extremely important in not only getting approved for a FHA Loan, but also in having a smooth closing that is not full of delays. If you have any questions or would like to be pre-approved or you would like me to review your credit, give me a call at 858-922-7899 or email at homeloan8@gmail.com.
Warm Regards,
Rob Chomentowski
Sr. Loan Officer (and FHA specialist)
858-922-7899
Your Income and Applying for an FHA Loan
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