An FHA loan is supposed to be one of the best loans for first-time home buyers and more recently, for anyone looking to purchase a home. There are many reasons for its attractiveness including a low down payment requirement and low interest rates. FHA loans do have certain credit report requirements in order to be approved, however, and in some states, a credit report is required for both people in a marriage, regardless if one is a non-borrowing spouse. Typically the credit of the non-borrowing spouse will not be a reason for denial of the loan, but the debts will play a factor in the debt-to-income ratio.
What does the Credit Report Need to Say?
There are several things that the FHA loans will require on a credit report in order to be approved. Up first is the need to have at least two open trade lines. This can sometimes be difficult for first-time home buyers that have little to no credit history, but it is important in order for the lender to determine whether or not you have a history of paying loans back on time. If there are no trade lines on a borrower’s credit report, sometimes alternate sources can be used, such as a rent history, utility payment history or insurance payment history. Not every lender will accept these alternate sources, as many are requiring a minimum credit score in the wake of the housing crisis, but it is worth finding out if your lender is willing to substitute credit items.
What if there is a Bankruptcy?
A bankruptcy does not ruin your chances for obtaining an FHA loan, but it could make it a little more difficult. Plan to have a paper trail leading up to the event of the bankruptcy as well as a well written explanation of the situation that put you in that scenario. In addition, you will need to have established a good credit history following the bankruptcy as well as have the credentials to qualify for the loan. Last but not least, you also need to be gainfully employed with a steady income. There are two different types of bankruptcies that you can have experienced and each of them has different rules regarding how soon that you can apply for an FHA loan:
- Chapter 7 – You must be 2 years out from the discharge of your bankruptcy. This is not the date that you filed the documents, but the date that the judge dismissed all of your debts.
- Chapter 13 – You must have been making timely payments on your Chapter 13 bankruptcy for a period of 1 year before you can apply for an FHA loan. In addition, the trustee that is overseeing your bankruptcy needs to provide approval of your ability to add the new mortgage into your debt repayment plan.
What about Credit Blemishes?
Everyone has experienced a credit hiccup at least once in the last few years. The FHA has made their guidelines so that underwriters are looking at the overall picture of your credit history, not just one incident of a late payment. If you have a history of late payments that have not become current within the last year, it might preclude you from being approved for an FHA loan, but one or two mishaps likely will not have a negative impact. Even minor collection accounts are often overlooked as long as the rest of the credit history is in good condition. What is not overlooked, however, are judgments. Although judgments do not require an automatic denial, they will be required to be paid before the loan can close. If any of your judgments are government related, such as taxes or student loans, you will not be eligible for an FHA loan.
FHA loans are easier to qualify for in comparison to conventional loans, especially if you have a bit of a blemished credit history. It is worth talking to your lender honestly about what your financial history looks like and what can be done to get you approved for an FHA loan.
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