The FHA 203K loan is fairly easy to qualify for, just like the standard FHA loan. You are able to have some credit blemishes and with proper explanations, many exceptions may be granted. Of course, this depends on the lender and what your exact situation looks like as each lender has their own requirements, but there are plenty of FHA lenders out there ready to give you a loan. Although the FHA does not require perfect credit to obtain a loan with them, even a rehab loan, there are certain ways that you can enhance your chances of getting this type of loan.
Make your Housing Payments on Time
Your housing payments carry the greatest weight in terms of FHA loans. When lenders look back at your credit history after assessing your score, they look at the housing history. If you have late housing payments within the last 12 months, your chances of getting an FHA loan go down. This does not mean it is impossible to get a loan, but you will have more difficulty. The best way to prevent this from occurring is to plan ahead – if you know you want to apply for a 203K loan in the future, make sure your housing payments are on time for 12 months in a row.
Take Care of your Collections
If your credit report is filled with collections, now is the time to get them paid. If you plan ahead, you can save up enough to pay off as many collections as possible. The only type that lenders might overlook is medical collections, if you can prove that you are not responsible for paying them. Other than the medical type, however, you should do your best to pay as many off as possible. The fewer collections you have, the higher your chances of getting approved for an FHA loan.
Bounce Back after Bankruptcy
If you suffered a bankruptcy, you have two different time periods you may have to wait, depending on your situation. If you claimed bankruptcy for any reason other than that you were downsized or let go because your company closed during the economic downturn, you will have to wait 24 months after the date of the discharge of your bankruptcy. In the meantime, however, you can start building your credit back up. Make any payments you have left on time and start applying for small credit lines, even if they are secured credit cards to get your score back up. If you were a part of the group that lost their job and therefore 20 percent of their income as a result of the downsized economy and you can prove it, you may only have to wait 12 months for a 203K loan, but you still have to make a positive comeback financially.
Lower your Utilization Rate
The utilization rate on your credit report is the amount of outstanding debt you have compared to the amount of credit available to you. For example, if you have 3 credit cards each with a $2,000 credit limit and each one has an outstanding balance of $1,990, you have basally maxed out your credit limit and will have a very high utilization rate. On the other hand, if you have the same 3 credit cards and yet the balances are $150, $500, and $700, you are in much better shape. Typically, lenders like to see your credit utilization rate under 30 percent for revolving debt. While you plan for your future FHA loan, do what you can to get your outstanding credit paid or at least paid down.
Keep Long-Term Accounts
If you have credit accounts that you no longer use, you might be tempted to close them out, but if you wish to apply for a 203K loan in the future, don’t close them. The more accounts you have open that have a long history, the higher your credit score gets. It shows that you have financial responsibility and can keep accounts without the bank closing them because of your inability to pay. It is all about finding the perfect balance between too many accounts and too few accounts. Typically, the older accounts are a much better bet than new accounts because too many new accounts can cause your credit score to decrease.
Planning ahead can help you straighten out your credit and get the FHA 203K loan you desire. Typically a 12 month history with no issues is what the lender will look for, but you may have to perfect a few other issues in the meantime. The sooner you start planning for your FHA loan, the better off your chances will be of getting approved.Click to See the Latest Mortgage Rates»