Piecing together your credit can sometimes be confusing. That's why you should always seek a qualified loan officer that is a FHA Expert.
In all honesty, credit is not as difficult as it may seem and FHA has made it easier for you to qualify for your dream home. There are just some important facts that the average consumer needs to know.
Several key facts :
- You don't need credit scores. No minimum credit scores.
- Non-traditional credit can be used.
- Very flexible on credit issues when it comes to collections, charge-offs, judgment, and even liens.
What an underwriter looks for usually is good established credit in the last 12 months. This is not written in stone, but definitely helps. The beauty about FHA loans is the fact that your credit could be less than perfect less than 12 months while purchasing a house. It comes down to the reasons why and a make sense approach. We understand that things happen in life. But they do need to be documented.
Great assets of a FHA mortgage and the credit requirements :
- A Chapter 7 bankruptcy (liquidation) needs to be 2 years old from date of discharge. Less than 2 years depending on extenuating circumstances.
- A Ch 13 can be 12 months out of bankruptcy while in repayment (not discharged), as long as you can show 12 months of payments on time.
- Usually want to see reestablished credit with no lates after a bankruptcy. But the best part of this is that the underwriter at his or her discretion can overturn the time frame of a bankruptcy depending on if the circumstances were out of your control.
-- Death in the family
-- Loss of job(s)
-- Sometimes divorce -- not always, depending on the circumstances.
- Consumer Credit Counseling -- sometimes viewed the same way as a Ch. 13 bankruptcy, guidelines are similar. The lender needs to see a 12-month payment history from the credit-counseling agency showing satisfactory payments and a letter from agency saying that the loan will not adversely affect the applicant's ability to repay current debts.
- Foreclosure -- Generally 3 years must have passed. But the catch here is, we don't use the date when you went into foreclosure. It's 3 years from the date that the house was sold after it went into foreclosure. This is on HUD insured loans. There are extenuating circumstances and exceptions that can be made.
- Delinquency or Default on Federal debt -- This seems to be overlooked by many loan officers. You can not obtain a FHA loan if delinquent or obligated on any type of federal lien. ie. school loans, etc. The account would need to be brought current, paid, or otherwise satisfied. And a payment plan is satisfactory as long as it's in writing and that you have established some payments on time.
What happens if I have no credit at all?
We call this non-traditional credit. Here is a list of things that we could use. But we would need some type of proof. And we usually want to show a 12 month payment history on letterhead from that agency, store, or company.
- car insurance -- showing your monthly or quarterly payment, how long, never late, how much a month.
- utility bills
- cell phone bill
- repayment of loans or past debt -- doctor bills, collection accounts, etc etc
- store accounts and so much more.... anything that can be documented to show a credit history on paper
Unique credit traits of a FHA loan that conventional loans don't offer :
- At the discretion of the underwriter, collection accounts and medical collections can be opened. More times or none though, collections outside of medical usually have to be paid off.
- Many say that if you have a lien show up on credit, that it needs to be paid in full. It depends on the type of lien and if it doesn't show up on title. Example : If you have car repo that is now a lien on your credit, as long as you have a repayment agreement and have made at least 6 months of payments on time, this is acceptable.
Summary : FHA loans can be manually underwritten even if it comes back as a refer. As long as we can determine decent credit risk, several things can be overlooked. But we would need compensating factors. 2 months reserves is usually a big one. There are others.