FHA Mortgages: Common Questions From Borrowers With Credit Issues
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Via the Federal Housing Administration (FHA) home loan program, the U.S. government has helped millions of people finance homes since 1934, insuring their respective loan for banks against loss or default.
In order to get “FHA insurance against default”, however, banks must make sure that FHA applicants meet minimum qualification standards.
Collectively, these standards are known as FHA Guidelines and they’re the rulebook by which all FHA mortgages are underwritten and approved.
FHA-insured home loans are used by homeowners of all types. Some have high FICO scores, some have low FICO scores. Some show high debt-to-income ratios, some show low debt-to-income ratios. Some have home equity, some are underwater.
However, for applicants with derogatory credit in their respective credit histories, applying for a loan with the FHA can be the simplest path to approval.
Whether you’re using the FHA for a low-down payment purchase loan; or, refinancing via the FHA Streamline Refinance, there are some things you’ll need to know, however, and what follows are five common questions from FHA mortgage applicants.
1.”Can I get an FHA mortgage if I have no credit history?”
No, currently you cannot obtain an FHA loan without credit history.
Typically, the FHA wants its homeowners to show three eligible, open lines of credit in order to meet FHA loan approval standards. FHA prefers to see traditional credit, which includes mortgage payments, credit card payments, and auto loans, for example.
2. “Can I get an FHA mortgage if I’ve filed for bankruptcy?”
Yes, you’re eligible for an FHA mortgage if you’ve filed for bankruptcy protection.
For a Chapter 7 bankruptcy filing, typically, the FHA wants to see at least two pass between the date of bankruptcy discharge and the date of home loan application. Note that this is not two years from the date of bankruptcy discharge to the date of closing — it’s two years to application.
Exceptions can be made against this two-year moratorium. Borrowers identifying an isolated, one-time life event which led to the bankruptcy, and whom can show that credit has since been re-established, can ask their lender to make an exception against the official FHA guidelines.
For a Chapter 13 bankruptcy filing, the FHA will want to see that the mortgage applicant has made payments to creditors on time for a period of at least one year, and will want the written approval of the court-appointed trustee. Furthermore, the FHA will want the applicant to provide a letter of explanation for the bankruptcy filing, and to show that satisfactory credit has been since re-established.
3. “Can I get an FHA mortgage if I’ve missed a mortgage or rent payment?”
Yes, you can be approved for an FHA mortgage if you’ve missed a mortgage or rent payment. The FHA adheres to strict payment history guidelines for its FHA Streamline Refinance program, but for its purchase money loans, guidelines are more flexible — especially if there’s a “good reason” why payment(s) were missed.
The FHA gives banks limited latitude to make common sense decisions. If a borrower’s credit history indicate one or several late or missed payments within a small window of time, followed by perfect payment histories across all creditor accounts, and a sufficient amount of “seasoning” of payment history since the late payments were made, along with a well-written letter of explanation (LOX) may be all that’s needed to get that FHA home loan approval.
4. “Can I get an FHA mortgage if I’ve had a foreclosure?”
Yes, you can get an FHA mortgage if you’ve had a foreclosure. The FHA frowns upon foreclosures, instituting a three-year lockout period for homeowners who have been foreclosed upon, or who have received a deed-in-lieu of foreclosure.
However, in situations when the foreclosure was the result of extenuating circumstances, and where satisfactory credit has been since re-established, an exception to the 3-year waiting period may be granted.
5. “Can I get an FHA mortgage if I have judgments, collections and federal tax liens?”
Yes, you can get an FHA mortgage if you have collections. Prior to July 1, 2012, the FHA discussed a limit on collections, stating that an applicant’s credit report must not show more than $1,000 in aggregate debt collection. That plan was scrapped, however. There are no dollar limits for items in collection on an FHA mortgage applicant’s credit report.
Applicants with outstanding judgments and/or federal tax liens, however, won’t have much luck. The FHA requires that all judgements be paid-in-full and that all federal tax liens be resolved prior to closing on an FHA-insured mortgage.
Get A Rapid FHA Mortgage Approval
The FHA mortgage program is nearly 80 years old and, literally, millions of U.S. homeowners have been FHA-insured at some point or another.
If you’re looking at FHA-backed home loans for your next purchase or refinance, get started with a rate quote. FHA mortgage rates are often as low, or lower, than comparable conforming loans.