December 18, 2013
A reader asks, “I’m looking to be a first time home owner by July 2014. My credit isn’t good (607 at this time). However, I’m looking to improve my credit score significantly by June. I’m unsure where to get started in the process of getting a mortgage loan. Just need some help with the very basics in getting started.”
Borrowers who need to improve their credit scores before applying for an FHA home loan need to be realistic about how long it might take to do so. It’s strongly recommended that borrowers come to the FHA loan process with at least 12 months of on-time payments for all financial obligations before applying.
Why is that? The answer can be found in the FHA loan rulebook, HUD 4155.1, which has a variety of credit guidelines which apply depending on the type of FHA loan. Credit repayment history is one of the strongest indicator the lender has when trying to determine whether a loan applicant is a good financial risk. Consider these guidelines, which apply to borrowers applying for FHA Cash Out Refinancing loans:
“Borrowers who are delinquent, in arrears, or who have suffered any mortgage delinquencies within the most recent 12 month period under the terms and conditions of their mortgages are not eligible for cash out refinances.” And let’s examine what the FHA instructs lenders on the subject of credit in HUD 4155.1 Chapter Four, Section C:
“When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”
In addition to bringing at least a year of on-time payments on your credit history to the FHA loan application process, applicants with low credit scores may need time to raise them—this may take longer than just a few months to accomplish and the minimum required FICO score for maximum financing may vary from lender to lender. The FHA does have a more forgiving FICO score requirement (500 or above to be eligible for an FHA loan in general terms) but that does not mean the lender won’t require a higher score.
The best course of action in cases like the one mentioned in the reader question is to call the FHA directly at 1-800 CALL FHA and ask for a referral to an FHA/HUD approved housing counselor who can assist with advice on how to become a well-prepared borrower and how long that preparation might take.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at www.FHA.com, a private company and not a government website.
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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