The FHA requires a credit score of 580 to qualify for the loan. That’s the FHA, though. Certain lendersmay require a higher credit score. It depends on what your other factors look like. For example, if you have a high debt ratio and unstable income, a lender probably won’t accept a 580 score. That’s three risky factors – what are the odds you’ll make your mortgage payments on time? In the eyes of the lender, it’s not very high.
An unknown fact about the FHA is that they will actually allow scores as low as 500. There’s a catch, though. You will have to put down a large down payment. Anyone with a credit score between 500 and 579 must put down 10% on the home. This takes away from the benefits of the FHA loan, as the largest benefit is the low down payment requirement.
Getting Over Bad Credit
Putting the credit score aside, lenders also look at your credit history. While they focus on the score to determine the size of your down payment, the history matters more.
Let’s say you have a 600 credit score, but you have three late payments in the last 3 months on another debt. This doesn’t look good to the lender. Your score is high enough to qualify for the loan, but your history shows a pattern of irresponsibility.
If you have a blemished credit history, you’ll have to take steps to get over it:
Bring any late payments current – Try to have all timely payments before the lender pulls your credit. If you have late payments in the past, you will at least show that you were able to get over them. If you have an explanation for the late payments, you’d be in even better shape.
Take time to recover from a bankruptcy or foreclosure – The FHA loan has specific waiting periods after a BK or foreclosure. Generally, you must wait 2 years. Regardless, you must prove that you picked up the pieces and can handle your financial responsibility now.
Straighten up your credit – If you have a lot of debt, try to get yourself out of it. Pay your credit cards down or off, if you can. Just don’t close the old accounts. You need the older accounts to help keep your average account age high. The older your accounts, the higher your credit score will go.
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