Your Credit History and Applying for an FHA Loan is a post from: FHA,VA and Conventional Home Loans in all 50 States

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

homeloan8@gmail.com

FHA Loans for Borrowers Who Lack Credit Scores is a post from: FHA,VA and Conventional Home Loans in all 50 States

The credit scoring system requires a person have active trade lines reporting so the 3 credit bureau’s Experian, Equifax and Trans Union can produce credit scores for that person.   These trade lines are usually loans or revolving credit accounts.  Such as auto loans, student loans and credit cards.  But there are some people out there that would like to buy a house but they do not currently have any trade lines.  They do not have a auto loan, credit card or other loan that reports to the credit bureau’s.  Well this is OK, because FHA loans allow something called “non-traditional” credit.

With a non-traditional credit borrower we can build a credit report for that borrower by other means.  What we will do is ask the borrower for the the following items:

1. Verification that rent is being paid for the last 12 months

2. Verification that utility bills are being paid on time the last 12 months (gas, electric, etc..)

3. Verification telephone service has been paid on time the last 12 months

4. Verification the cable TV bill has been paid on time the last 12 months

We will send a verification to your landlord to verify rent payments have been paid on time the last 12 months.  With items 2,3 and 4, you can call up the provider of these services and ask for a letter stating that you have paid your bill on time the last 12 months.   Then we will take these items to our credit services company and have them produce a “non-traditional” credit report.  This will allow us to get you approved for a 3.5% down FHA home loan.

If you do not have all of the 4 above credit sources.  We can also use 12 month payment verification on the following items to help produce a non-traditional credit report for you:

• Auto or medical insurance accounts
• Cell phone accounts
• Child care service
• Internet service
• Personal loans from individuals supported by cancelled checks

So if you are concerned that you won’t be able to qualify for a home loan because you lack a credit score, don’t worry, there is still a great chance you can get that loan.   However to clarify, non-traditional credit as discussed will not help if you if you already have poor credit.  This method is only for people who have “no” credit or insufficient credit.

Please feel free to call or email if you have any questions or would like to get a free pre-approval for a home loan.

Warm Regards,

Rob Chomentowski

rob@affinity-financial.com

858-922-7899