The Federal Housing Administration offers government-backed loans that have low down payment and attractive interest rates. Another reason that makes the FHA mortgage loan popular is its flexible requirements.
If the FHA loan claims to be flexible with their requirements, will someone who has bad credit still be able to qualify for such financing? Let’s find out.
A Good Score is Okay. Excellent Score, Better!
For a borrower to be eligible for a convention loan, most lenders will require a
minimum credit score of 660. This score is good enough so that a homebuyer can get a good interest rate. Note that a 20 percent down payment must also be made to get a good rate.
With the FHA loan, however, the credit score requirement can be lower. A borrower with a score of 580 may still qualify for a mortgage. But since FHA loans are guaranteed loans, lenders who provide the financial backing may have credit requirement overlays.
Certain lenders may have higher credit score requirements than the one set by the FHA. This requirement can be similar to that of a conventional financing. This credit score requirement may be influenced by other factors such as debt-to-income ratio, and income stability.
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If your income is unstable and your DTI ratio is high, an FHA-approved lender may not accept a 580. These factors are considered red flags, putting the lender at a very high risk.
Even if an FHA Loan is known to be flexible, its rules still require that the borrower’s creditworthiness is determined.
To determine this, the lender or underwriter will have to examine the 4 C’s of Credit: (1) the borrower’s credit history, (2) capacity to repay the mortgage, (3) cash assets need during mortgage closing and (4) the collateral (which pertains to the property as sufficient collateral).
If you have poor credit, will this be the end of the line for you in getting FHA financing?
The answer is no. You can still get an FHA
home loan even with bad credit. However, just how low they can get highly depends on several factors.
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Normally, for people who have good or excellent credit, they will be required to shell out a 3 percent down payment. But if you’re someone whose credit score is less stellar, you will have to do better than a 3 percent down payment.
If your score is below 580, you may have to compensate for this poor credit by putting a larger
down payment. Typically, this should equal 10 to 20 percent of the home price.
Simply, the large down payment acts as a compensating factor to the borrower’s
bad credit. But is the ‘large down payment’ the only way? Certainly not. A combination, if not all, of these factors can increase your chances of qualifying for an FHA loan and getting a better interest rate.
Aside from the income, lenders take a look at your assets. These reserves can act as funds to cover the down payment or as a contingency in case the borrower experiences hardships in making future payments.
Low Debt-to-income Ratio
A bad credit score doesn’t always mean high DTI ratio. In some cases, people may have poor credit but still keep an impressive debt ratio. The lower the Debt-to-income ratio, the lesser risk for lenders. This shows that even if your score looks poor, you don’t take debts that your finances can’t handle.
The longer you are working in the same job with the same employer or field, the better. A stable job ensures tenure. This also means that you have a more stable source of income than someone who hops from one job to another. A strong employment makes a lender more confident in giving you a mortgage knowing you have a stable source of funds to repay it.
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