How to Qualify for Bad Credit Mortgages with the FHA

Views: 137

Thousands of borrowers select bad credit mortgages with FHA every year. If you are shopping for a new home, you may want to consider a home loan that is insured by the Federal Housing Administration. Realtors, lenders and home buyers continue to use FHA as the go to loan type for mortgages with bad credit scores. The FHA mortgage for bad credit is a good option for house buyers who have low to moderate incomes, average or low credit scores, and lack a 20% down payment.

bad credit mortgages

Americans have come to rely on FHA mortgages when they have low fico scores or credit problems in their past.

If you have poor credit scores and want to get approved for a FHA bad credit mortgage, it is not difficult to do for most people. Here’s what you need to do:

#1 Minimum Credit Score Starts at 500

FHA borrowers do not need to have a high credit score. In fact, your score can be quite bad and still qualify with some lenders. However, the minimum score you usually need today is at least a 580. Yes, FHA will insure bad credit mortgages with scores as low as 500 but most FHA approved sources implement their own minimum credit scores for FHA programs.

Still, some lenders may continue to work with you if you have a score under 580. If the loan to value is 90% or less, you may be able to get a loan. In that case, you would need at least a 10% down payment.

If you are applying for a FHA bad credit mortgage with another applicant, the credit score for the other party also will be considered; the lower credit score is the basis of the credit decision. There are still a handful of bad credit mortgage lenders that advertise FHA mortgages so relax and do your research.

#2 Down Payment Requirement Starts at 3.5%

One of the best things about an FHA loan is that you do not need to bring 20% down to the table. If you put down only 3.5%, you can usually get an FHA loan. This is very welcome news for most first time buyers as you may not have much in the way of cash available.

If you have a credit score of under 580, you will likely need to have a 10% down payment to get an FHA approval.

See Today’s FHA Mortgage Rates

#3 No Exact Income Requirement

Another benefit of FHA mortgages are that there is no exact requirement for income. The exact income requirements will vary depending upon the lender.

However, you do need to provide proof that you have sufficient income to pay your loan. You also have to show that you have enough income each month to pay for your living expenses and other debt obligations.

For most borrowers, the requirement for FHA approved lenders is a maximum of 43%. In a few cases a debt to income ratio of up to 45% can be approved.

#4 Clear CAIVRS Report

A very important requirement for an FHA mortgage is to have a clean Credit Alert Verification Reporting System (CAIVRS) report. This is a federal government system that tracks people who have late payments, have defaulted or been foreclosed for money they owe the US government.

This will include federal student loans, FHA mortgages and SBA loans. You also need to not owe any federal taxes to the US government. But as long as you have an installment plan set up for a delinquent loan or federal taxes, you should be able to still get an FHA loan.

If you defaulted on an FHA loan, you must wait at least three years after the lender was paid off before you can be approved again.

#5 Minimum Property Standards Apply

The property you seek funding for can need some repair, but it needs to be inhabitable and meet basic FHA standards. You can use an FHA loan to buy a single family home, condominium, duplex, or townhouse. FHA loans also can be obtained for buying a manufactured home.

#6 Not Just for First Time Buyers

You do not need to be a first time buyer to get a bad credit mortgage insured by the FHA. You also can use a FHA financing to make energy and home improvements on the property.

If you are an FHA borrower over 62 and have a low mortgage balance, you may be able to qualify for a reverse mortgage to use your home’s equity on whatever you need.

#7 Other FHA Requirements

If you have a short sale, foreclosure or bankruptcy on your record, you may be able to get an FHA mortgage loan still.

Regulations have changed a good deal on FHA mortgages after the mortgage crash to make it easier for people to buy a home.

If you had a foreclosure or bankruptcy, you may be able to get a new home loan after only a year. Note that stricter lending requirements will apply, and not every lender will approve you. Still, know that there are options even if you have a serious black mark or marks on your credit file in the last few years.

An FHA loan is easier to qualify for today than ever before. The FHA bad credit mortgage really is one of the best options for anyone who has poor credit and has recent delinquencies, foreclosures or a bankruptcy on their record.

You should know that if you have poor credit, however, not every FHA approved lender will work with you. You might have to apply to several to get an approval.

While FHA does not set exact credit and income standards for FHA backed loans, the lender can set up their own criteria. So not every person will qualify for every FHA lender’s programs.

You can apply to several FHA approved lenders and not worry about it dinging your credit score. You can apply for many bad credit mortgages in a 60 day period and it only counts as a single inquiry on your credit report.

bad credit mortgages

FHA has been helping families become homeowners with bad credit mortgages since 1934.

Top 4 FHA Mortgage Programs for 2017

It is understandable why many home owners and potential home owners are attracted to FHA mortgages with bad credit.

These mortgages, which are backed by the Federal Housing Administration, offer borrowers many advantages:

  • Flexible credit requirements: FHA actually does not set a minimum credit score to get a home loan; individual FHA-mortgage lenders can and do set minimum credit score requirements. But there are thousands of FHA-approved lenders across the country. Thus, you can benefit greatly by checking the credit requirements with various lenders. Some FHA-approved lenders allow you to get a bad credit mortgage with a 580 credit score.
  • Low down payments: The FHA loan program is one of the few left in the country with very low down payment requirements. For those with a 580 or higher credit score, you may be eligible for a 3.5% down payment. People with lower scores will need to put down 10%.
  • Flexible underwriting: FHA-approved lenders have more flexible income requirements than traditional lenders; also, their debt to income ratio requirements are flexible. So if you have moderate income and a lot of debt, you still may be able to get an FHA loan.

For the above reasons, it is clear why FHA home mortgages are very popular in America today. It is estimated that two out of five new home loans are FHA mortgages.

If you are interested in an FHA financing, be aware of the top FHA loan programs that are available in 2017:

Fixed Rate FHA Mortgage Loan

Without a doubt, the most popular FHA mortgage loan for 2017 is the fixed rate mortgage. This type of FHA loan has a low, fixed rate throughout its 30 year or 15 year term. Rates on FHA loans continue to be advertised competitively in the marketplace.

Many Americans choose an FHA fixed rate loan for 2017 for the following reasons:

  • The interest rate on the loan can never change, unless you choose to refinance the loan to take advantage of a lower interest rate
  • Your payment is fixed for the entire term of the loan, which makes it easier to plan financially in the coming years. The only part of the payment that can change is the taxes and/or insurance
  • Fixed rate loans are easier to understand and much more predictable than variable rate loans

Adjustable Rate FHA Mortgage

Some people choose an adjustable rate FHA loan because the interest rate will be quite a bit lower than the fixed rate loan – at least at first. FHA adjustable rate loans have a low rate for the first one, three, five or seven years, but then will adjust to current market rates.

The adjustable rate FHA mortgage is based upon an economic index that will be stated in the loan documents. Whatever the rate is for that index when it is time for the rate to adjust, your interest rate could go either up or down.

Adjustable rate FHA mortgages are considered very attractive for some buyers because they offer a lower mortgage payment at first. This can allow the borrower to buy a bigger or more expensive home.

However, the problem with an ARM FHA loan is that the interest rate is not certain in the future. As long as the interest rates do not rise substantially, the borrower will be fine. But if interest rates rise, and the economy slows down, many ARM loan holders may find they do not have the income to pay their mortgage. This is what happened in the mortgage meltdown, as interest rates reset on ARMs and home owners could no longer afford the payments.

You could be a good candidate for an FHA adjustable rate loan if you are going to sell your home in a few years before the loan resets. Or, you feel confident that your income will be such down the road that you will be able to pay the possibly higher payments.

FHA Streamline Refinance

Another very popular FHA refinance program for 2017 is the FHA streamline refinance program. If you have a current FHA loan and you are on time on your payments, you may qualify for the streamline program that enables FHA bad credit mortgages.

This could be a smart financial move for you if the interest rates are at least .5% lower right now than your current rate.

If they are, you may be able to refinance your home without having your credit checked, income verified, or even a current home appraisal. In other words, doing an FHA streamline refinance loan can be extremely easy and take only a few weeks.

The streamline refinance program is a good option if you want to reduce your monthly payment by as much as $200 or even more.

FHA 203k Home Improvement Loan

The FHA 203K loan allows you to borrow cash with one loan for both your home purchase and for rehabbing the property.

This type of FHA mortgage can be a good fit for the buyer who wants to buy an older home with potential, but in need of repair. The 203k loan problem can fund both the purchase and repairs and temporary housing while the home is being rehabbed.

This type of loan is fairly easy to qualify for, but you do need to have a full rehab project laid out by a licensed contractor and approved by FHA.

The above are some really good and popular FHA loan options for 2017 that could be a good choice for you.

About Dusty Brazil

CA BRE #01780273- Dusty Brazil is a top ranked Realtor with Pacific Sotheby's International Realty. Mr. Brazil has been selling real estate in San Diego for over 10 years and lived in this coastal community his entire life. Dusty is an accomplished surfer who enjoys writing home buying articles when he is not catching waves.