As we mention in the FHA qualifications page, the current minimum credit score to required to be approved for a traditional FHA loan is 580. (H4H loans do not have such credit requirements). In this page we will discuss some of the things borrowers should do to improve their credit scores in order to qualify for a government-back mortgage.
“Middle Score”
A credit score is also known as a FICO score. When you are applying for a home loan the banks that fund FHA loans require a credit check and they use what is called your “middle score” when determining your credit worthiness. There are three major credit bureaus in the US — Experian, Equifax, and TransUnion — and lenders require that your credit report be pulled at all three bureaus when you apply for a loan. A credit report that includes all three bureaus is called a tri-merge credit report. Determining your middle score is simpler than you might imagine; it simply means discarding the high score and the low score and using the middle score on a tri-merge credit report.
580 minimum
The FHA officially has no minimum FICO score requirement but the banks who lend the actual money have, as of 2008, set a minimum FICO score requirement at 580. That means that if your middle score is below 580you will need to improve your score or you will not qualify for an FHA loan.
Other credit issues that will disqualify you from getting a regular FHA loan
- A chapter 7 bankruptcy in the last two years
- A foreclosure in the last three years
- A chapter 13 bankruptcy in the last 12 months
- Unpaid tax liens, judgments, or non-medical collections (Some medical collections are acceptable but non-medical collections must be settled/paid off)
- Recent 30-day+ late payments on mortgages, credit cards, or other obligations (if it looks like you are living beyond your means currently you likely won’t qualify for an FHA loan until you can get 6+ months of on time payments on your obligations)
(Note: See this category for details on the HOPE for Homeowners program for borrowers who owe more than their home is currently worth.)
Some resolutions to credit problems
When someone has credit problems these are the solutions we usually use:
1. Pay down credit cards. This is an easy way to raise credit scores. Simply bring your credit card balances down to less than 30% of the credit limit and your scores will shoot right up.
2. Document incorrect information. Credit reports often have incorrect information. If you can document that a reported outstanding collection has already been paid or that other derogatory line items are incorrect we can often get the information deleted or ignored.
3. Pay off outstanding collections, tax liens, or judgments. In many cases debt collectors will accept 40% of an outstanding debt as payment in full. When the number and size of collections aren’t overwhelming simply settling with the collector and getting paperwork to prove it is often the best approach. If there are a lot of collections we often refer people to companies that specialize in debt settlement.
4. Work with credit optimization professionals.* When someone’s credit history is especially beat up with old late payments, collections, bankruptcies, etc. being reported, the fastest way to get qualified for an FHA loan is often to work with a credit optimization specialist. We often recommend a company that has been especially effective for people with messy credit histories. They charge $99 per month and have consistently made a massive difference in six months or less for people we have referred over. Working with a credit optimization specialist is often the only route to take for people with hammered credit histories but who need to refinance in the next six months. Keep in mind that using such a service only works if you are able to make all of your current payments over the period you are working on your credit.
5. Work with a credit counseling company. If you are dealing with a loss in income and are currently behind on your monthly mortgage or other obligations sometimes a credit counseling company is the best bet. In such cases we refer people to an especially effective and reputable credit counseling firm that focuses on helping people slowly pay back all of the principle they owe while paying dramatically reduced interest rates. Working with such a firm can be a great way to get back on one’s feet financially. The firm we recommend people to charges something between $40-50 per month. Be aware that going this route means that borrowers must make the credit counseling payments on time for a full year before qualifying for an FHA loan.
* Our credit optimization reimbursement program
We have a reimbursement program for people who do need help from a professional credit optimization company. As we mentioned, the company we recommend charges $99 per month and usually completes their work in about six months. After your credit is fixed up we will help you refinance into a better loan and can reimburse up to $500 of your credit repair bill at closing. If you think this program will be useful to you just fill in the contact form in the sidebar and let us know you are interested in fixing your credit and our reimbursement program. Then go fill in our secure online application here and we will take a look at your credit report and have the folks at our preferred credit optimization firm contact you to get started.
