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Your lender will decide if you qualify for a mortgage based on the “Four 4 C’s of Credit”:
How the lender rates you in each of these four categories determines your ability to repay the loan on a monthly basis. Don’t worry, FHA is much more forgiving in each of these areas than conventional financing is.
Your credit history involves what you’ve borrowed in the past, and how well you’ve paid it back. FHA loans have much more tolerant credit guidelines than do conventional loans. If you have had credit issues in the past, they can be overlooked as long as you have been current on your bills for at least the previous 12 months. Also, a bankruptcy in the past does not prevent you from being approved for an FHA loan. Chapter 7 bankruptcies must have been discharged at least 24 months ago (12 months ago with extenuating circumstances), and Chapter 13 bankruptcies require at least 12 months of on time plan payments and approval from the trustee. If you have been turned down due to poor credit in the past, an FHA loan might be the right loan for you. However, if you feel that your credit will not qualify currently for an FHA loan, or you want to work to improve it, you can work with a credit repair company. They can work with you to try to remove incorrect items that are negatively impacting your score. These programs generally take between 45-90 days, and can have a significant impact on your credit score. The company we approve of is 2B Consulting, LLC. While 2B Consulting, LLC does charge a fee for their service, the amount you will save in interest over the life of your mortgage, car loans, and credit cards vastly outweighs this fee. To contact them with questions, or to enroll in the program, you can vistit them here . If you do sign up, please let your FHA Specialist know that you are working with them to improve your credit.
Capacity refers to your income and your ability to handle the monthly housing payments. FHA has less strict guidelines when it comes to your debt to income levels. Your income must, however, be fully documentable with W-2’s, pay-stubs, and/or tax returns. FHA loans also give you more credit for rental income on a two, three, or four family house, helping you qualify more easily.
Cash to Close
Cash to close refers to money for the down payment and closing costs. FHA loans require only a 3.5% down payment. This can come entirely from a gift or a grant. In addition, FHA loans allow the seller to pay up to 6% of the purchase price toward your closing costs. This means that you may be able to buy a house with little or no money out of your pocket.
Collateral refers to the home you’re buying. FHA will insure loans on 1-4 unit homes, condos, town homes, modular homes, and manufactured homes . FHA even allows mixed use properties utilizing the 203(k) rehabilitation loan.
There is one other thing that is important to remember: A lender cannot reject your loan application based on a lack of credit history or your decision not to use credit. If you do not have an established credit history, or if you do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments or other direct reports from credit providers.