FHA has always been a great loan for those that have had some credit issues. In the past few years, most lenders wanted to see a 620-640 credit score for FHA loans – FHA would allow lower, but lenders wanted higher!
Over the past year we have seen more lenders allow a 620 score and now we are starting to see more that will go down to 580. If your credit score is lower, you will need some type of compensating factor – it could be more down, maybe more reserves too. Your income is important, a lower debt to income ratio will also help if your credit score is lower. We like to see at least 2-3 compensating factors for those that have credit scores under 620 – it could be more down, taking a first time homebuyer class is a great compensating factor. Another one is income that we can't use – maybe you get overtime but do not have a long history – that can help. You will need to get an automated underwriting approval if you have a lower score.
Income is more important than it has been in the past – we used to see a lot of approvals at higher debt to income ratios – such as 50% sometimes even 54% of your income. If your credit score is lower, your debt to income will likely need to be under 41% to get an automated approval.
Your loan officer can help you figure out if it would make more sense to wait to buy or to try and get a FHA loan with a lower credit score. You may want to attempt to fix the items on your credit report to try and bring your credit score up before you buy, but at least you will have some options!
FHA also allows you to buy a home if you have filed a Chapter 13 bankruptcy as long as you have made at least a year's payments on the chapter 13, plus you need the court's approval. You can get a mortgage 2 years out of a chapter 7 bankruptcy.
FHA interest rates are also typically lower than conventional, so it can be a great way to get into a home if you have had come credit issues. Talk to your loan officer and see if an Fha loan might be right for you!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc, An Equal Housing Lender, NMLS#150953 - Email - Website
