September 23, 2021
The term “bad credit” tends to feel a bit stigmatizing.
Borrowers who have had past difficulty with credit have it hard enough trying to recover from the stigma of their previous credit issues without being confronted by those 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 get a fresh start with credit?
Technically the answer is, “it depends”, which isn’t very reassuring. But the truth of the matter is, there are FHA standards that technically make the concept of a bad credit mortgage a reality.
After all, on paper FHA loan rules state that a borrower with FICO scores in the 500 range could still technically qualify for an FHA mortgage if they can provide 10% down.
And, on paper, FHA loans also allow the lowest downpayment of 3.5% for those with FICO scores in the 580-or-higher range. It is true that participating lenders will have additional FICO score requirements (known as lender overlays in the industry.
Those overlays can include more than just FICO score requirements) and that your FICO score qualifications will be reviewed by different lenders through the “lens” of those overlays.
So what is the key to getting an FHA home loan with less-than-perfect credit?
The best place to start is in the planning stages. Start working on your credit by making on-time, every time payments, and start reducing the balances on your credit accounts.
Doing these things among other steps can help you improve your credit, which will be a big help when you are ready to turn in the paperwork or start filling out online forms to apply for the loan.
When you are ready to apply, if you worry that your FICO scores are still too low for the lowest down payment, remember that a higher downpayment is considered a “compensating factor” that can help offset a certain portion of a lower credit score range.
Another such compensating factor is a higher interest rate but if you work on your credit for at least a year in advance you may be able to improve things enough to avoid paying a higher rate.
Much depends on circumstances, your lender’s willingness to work with your circumstances, etc.
Above all, it’s a great idea to get expert advice as early as possible when trying to improve your credit. Did you know that the FHA and HUD offer referrals to HUD-approved housing counselors who can advise you on ways to prepare for your loan application?
Call the FHA directly at their toll-free number, 1-800-CALL-FHA and request a referral to the nearest HUD-approved housing counseling agency near you.
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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