The Federal Housing Administration (FHA) is one of the most forgiving government programs when it comes to insurance bad credit real estate loans. However, before you march in thinking that you will get one of the best mortgage loans with bad credit, there are some things that you should know about the FHA first.
What Will Happen If My Credit Score Is too Low?
The FHA gives bad credit borrowers every chance to make restitution for past financial mistakes. However, even the government has a limit. If you come into an FHA office with a credit score that is below 580, then you may not qualify for the extremely low down payment loan that they offer to almost everyone else.
In most cases, a borrower only has to pay 3.5 percent down in order to get approved for a loan. If your credit score is too low, then you may have to come in with 10 percent down. However, the private lender that actually gives the money for the loan will probably not approve the borrower. This means that you will probably need more than 10 percent down if your credit is that bad.
Keep in mind that the average credit score of people who were approved for an FHA loan stands around 697. Most of the people who paid 10 percent down had a credit score between 660 and 720, according to data gathered by the Wall Street Journal.
What Happens If I Have too Much Debt?
Even if your credit score is in line with the standards mentioned above, you may still have your loan application rejected by the FHA if your debt to income ratio is too high. There is no hard and fast number for this, but most accounts put the benchmark for a failed application at a 43 percent debt to income ratio. This number includes your proposed mortgage payment, a factor that is expected to take up about a quarter of your monthly income.
You may be able to get away with a higher debt to income ratio if you have a large amount of cash on hand. FHA lenders may also give you an opportunity if you can prove that you have paid housing expenses similar to the size of the mortgage over the past two years. If you can showcase a potential for increasing your earnings in the near future, you also get some leeway that is not afforded to the average loan applicant.
Will I Need a Co-signer?
Even if you get a co-signer to reduce your overall risk profile in the eyes of your FHA lender, you may still need to get that co-signer approved under FHA guidelines as well. If you cannot, then you may not be able to get approved yourself.
You may have friends and family who are willing to stick their necks out for you. However, do not take this privilege lightly. In order to be considered a co-signer, your guarantor will have to take a legal responsibility to pay back the mortgage if you default on the payments. If both of you default, it means death for both of your credit scores for a very long time.
Can I Get Away With Bad Credit If I Have Been Showing Improvement?
Bad credit items usually stay on the credit report for seven years. However, you may be able to get some leeway on these items if you can show your lender that your credit report has been solid for the past two years. This is hardly a guarantee that you will get approved; if you still have a credit score that starts with a five, then you should not expect this to save you on its own. You will also have to give a detailed explanation of every negative credit item that is on your report, so be prepared for a great deal of scrutiny from the FHA and possibly from other people from the Department of Housing and Urban Development (HUD).
How Can the FHA Reject Me If the Entire Purpose of the Organization Is to Help Low Score Borrowers?
The market for low score borrowers is expanding, meaning that the FHA may not have as much room to accommodate you as it did a few years ago. In 2013, according to figures from Carrington Mortgage Services, one out of every 500 borrowers were plagued with a credit score under 630. That is a lot of low credit score borrowers to service, and the fact is that the government simply cannot guarantee that many loans. The trend of people with bad credit seems to be getting bigger by the year as well, with no signs of reversing itself.
As the pool of bad credit borrowers continues to increase, you should expect the criteria for an FHA loan to get more stringent. Your best bet is to reverse your personal credit right now. Imagine all of the room at the top of the totem pole if there are so many bad credit individuals at the bottom.
2 Point Highlight
FHA lenders may also give you an opportunity if you can prove that you have paid housing expenses similar to the size of the mortgage over the past two years.
You will also have to give a detailed explanation of every negative credit item that is on your report, so be prepared for a great deal of scrutiny from the FHA and possibly from other people from the Department of Housing and Urban Development (HUD).
