FHA Mortgages

Unhealthy Credit score And FHA House Mortgage Choices


The term “bad creditworthiness” has a rather stigmatizing effect.

Borrowers who have had trouble with credit in the past are finding it hard enough to recover from the stigma of their previous credit problems without facing these problems every time they want to start working on their credit.

Is there such a thing as a bad credit FHA loan that can help people become homeowners and start over with credit?

Technically, the answer is “it depends,” which isn’t very comforting. But the truth is that there are FHA standards that technically make the concept of a bad credit mortgage a reality.

After all, the FHA loan rules on paper say that a borrower with FICO scores in the 500 range could still technically qualify for an FHA mortgage if they can afford a 10% discount.

And on paper, FHA loans also allow the lowest down payment of 3.5% for those with FICO scores in the range of 580 or higher. It is true that participating lenders have additional FICO score requirements (known in the industry as lender overlays).

These overlays may contain more than just FICO score requirements) and that your FICO score qualifications will be verified by various lenders through the “lens” of these overlays.

So what’s the key to getting an FHA home loan with less than perfect credit?

The best place to start is in the planning phase. Start processing your loan by making payments on time every time and start reducing the balances on your loan accounts.

Taking these steps, among other things, can improve your credit score which will be of great help when you are ready to turn off the paperwork or fill out online forms to apply for the loan.

When you’re ready to apply when you’re concerned that your FICO scores are still too low for the lowest deposit, keep in mind that a higher deposit counts as a “compensation factor” that can help make up a certain part to offset a lower credit score range.

Another such compensating factor is a higher interest rate, but if you work on your loan at least a year in advance, you can potentially improve things enough to avoid a higher rate.

Much depends on the circumstances, your lender’s willingness to work with your circumstances, etc.

Most of all, it is a good idea to seek expert advice as early as possible when trying to improve your credit score. Did you know that the FHA and HUD offer recommendations for HUD-approved housing counselors who can advise you on preparing your loan application?

Call the FHA directly at the toll-free number 1-800-CALL-FHA and request a transfer to the nearest HUD-approved housing advice center in your area.

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