November 13, 2012
A reader asks, “I want to buy a home. I am renting a house that cost me $ 1300.00 plus lights and water bill. I filed bankruptcy almost 3 years ago and my credit score is bad. I am working at the same place for almost 7 years for about 42,000.00 yearly. Could I get a FHA loan to buy a house?”
FHA loan rules, as described in HUD 4155.1 Chapter Four, explains what (from a lender’s point of view) is required when applying for an FHA home loan. Under the section of Chapter Four titled, “Hierarchy of Credit Review” we learn that FHA requires the lender to take several issues into account when evaluating credit:
“Evaluating credit involves reviewing payment histories in the following order:
first: previous housing expenses, including utilities,
second: installment debts,
third: revolving accounts.
Additionally, “Past Credit Performance” advises the lender, “Past credit performance is the most useful guide to determining a borrower’s attitude toward credit obligations, and predicting a borrower’s future actions.”
“Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”
What does the FHA consider to be an acceptable credit history? According to HUD 4155.1 Chapter Four, “Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments, unless there is major derogatory credit on his/her revolving accounts.”
That information is quoted directly from the FHA loan rulebook. But credit history isn’t the only factor–credit score is an important part of the equation. Credit scores are a stumbling block for some FHA loan applicants, and it’s important to understand that lender requirements can be more strict than FHA loan minimum credit scores.
In general, borrowers may have trouble getting approved by a participating FHA lender if they have credit scores below 620, and in some cases 650.
Borrowers with bad credit should call the FHA and ask for a referral to a housing counselor approved by the FHA. Housing counseling can help a borrower learn what it takes to get back on track with credit and move towards becoming a better credit risk. For more information call the FHA directly at 1-800 CALL FHA.
Do you have questions about FHA loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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