In this economy, the first step to buying a home is qualifying for financing. Once upon a time, a bad credit FHA home loan was defined as a loan to someone with between a 580 and 620 FICO score.
FICO stands for Fair Isaac Corporation, a Minnesota based credit monitoring and analysis company. This has become the gold standard in the mortgage and auto loan industries. This score is based on a calculation that takes into consideration payment history, total potential debt (credit limits), current actual balances, timeliness of payments, and the presence of adverse activity such as bankruptcy, foreclosure and repossession.
For people with good credit, from a FICO of 680 and up, getting an FHA home loan is a simple matter. All borrowers must have a down payment of at least 3.5% and enough available cash to cover closing costs. These costs can run between 1.5% and almost 3% of the total amount financed.
There are mortgage companies that despite the tightening of the credit market will still make a bad credit FHA home loan. This is because for an FHA loan, the value of the property and the ability of a person to pay based on income are more important than the borrower’s credit score. For a bad credit FHA loan, the borrower must have a stable work history for the last two years. In most cases, the loan officer wants to see those two years with a single employer, although in some instances, that can be waved in light of a promotion or moving into a higher-level position. That stable income has to be substantiated by two years of equal of growing Gross Adjusted Income as shown on the borrower’s W-2 wage and earning statement.
If the person has bad credit, there are certain specifics the loan officer will evaluate on the actual credit report. Rather than looking only at the FICO, FHA loan officers and underwriters look at the particulars. You may have a discharged bankruptcy on your credit report so long as it was discharged at least two years ago and your payment history since shows no 30-day late payments. A previous foreclosure does not preclude a bad credit FHA loan so long so long as it is at least 3 years since the foreclosure finalized and your payment history is perfect since on your other debt obligations.
Income is the critical factor in qualifying for any FHA loan, good credit or bad. Your monthly mortgage obligation cannot exceed thirty percent of your income before taxes. If you make $3000 per month, your mortgage cannot exceed $1000. This does place a limit of the size and price of the home an individual can purchase. However, this limit tends to keep any borrower, good credit of bad, within his or her means. In some instances, the FHA lenders will allow you to “stretch” to thirty-five percent of GMI in order to cover property taxes, insurance and other fees if it is clear from your monthly cash flow that the 5% stretch will not overextend the buyer.
Refinancing options also exist for bad credit. FHA home loan streamline refinances allow people with bad credit who are current on their mortgage payment refinance in order to lower their payment or take out equity in order to do home repairs or address other financial needs. There is no credit check so long as the mortgage being refinanced is in good standing and has been paid on time for the last twelve months and has been in effect at least six months. Some lenders will look at credit, but if you have at least a 620 FICO, most will at least consider your refinance.
Financing