How to Qualify for Bad Credit Mortgages with the FHA

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Dusty Brazil

Dusty Brazil
CA Realtor

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.

The FHA mortgage is a good option for buyers who have low to moderate incomes, average or poor credit, and lack a 20% down payment.

If you have low 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.

bad credit mortgages

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

#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.

#3 No Exact Income Requirement

Another benefit of FHA mortgage loans is 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 an FHA loan 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.

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.