The Federal Housing Administration (FHA) is an organization that provides insurance for mortgage loans. FHA lenders that offer FHA products will receive a guarantee from the government that if the borrower defaults on their mortgage loan, the FHA will repay the balance of the loan and the property will be foreclosed. The credit risk that goes along with sub-prime loans has prompted the FHA to tighten up their credit requirements for its 3.5% down payment program. Lenders still have the final say as to who is approved for these types of mortgages, and so they followed along with the FHA to the point where it is much more difficult to be approved for an FHA-insured mortgage than it was before the housing crash. However, there are still some ways that you can be approved for an FHA-insured mortgage loan even if your credit is below par. Here are five ways to be approved for these types of loans.
Come Up With A Substantial Down Payment
FHA lenders tend to only approve people who have a credit score that is higher than 580 for a 3.5% down payment loan. That means that those people whose credit scores are lower than 580 need to put together at least ten percent of the cost of the home. However, keep in mind that many lenders will still not approve an FHA loan for someone who doesn’t have a credit score of 580 or above, even if they put ten percent down. If this is the case than you may have to put even more together for the down payment, as this will increase your chances of being approved.
Work To Improve Your Credit Score
FICO states on its website that you can work to improve your credit score by paying off your credit card balances, and paying off all of your creditors without making late payments. This may be your only option as one report that came out in 2010 found that the average credit score for people who were approved for an FHA loan was 697. In order to be able to obtain a 10% down payment it’s estimated that your credit score needs to be somewhere between 660 and 720.
Have Recent Sound Credit
If you can prove that your credit has been impeccable in the last two years, even if it was not so before that then you could have a chance of being accepted for an FHA loan. Keep in mind that there is no guarantee that you will receive an approval if you have bad credit, but being able to prove that you’ve been credit-worthy in recent years can help your chances. Lenders that evaluate FHA applications have several underwriting guides that they must follow. For one, they must be able to thoroughly explain any bad credit that is on your credit report, and why you still deserve an FHA loan despite of it. However, in most cases FHA lenders are instructed to focus on the past two years, and not beyond that.
Highlight Your Compensation Factors
A compensation factor is anything that will provide supporting evidence that you should be approved for an FHA loan even when you have a debt load and income ratio that is higher than what is typically acceptable. For example, if you have more than 43% of your income going to debt, including the mortgage payments that you’ll have if accepted then FHA lenders usually would have to reject your mortgage application. That being said, your lender may consider your case for approval if you are able to prove a compensating factor like having a large savings account.
Find a Co-Signer
If your lender approves a co-signer because of their income, credit or another type of criteria than that may allow you to be approved for an FHA loan. However, it’s crucial that you take this seriously, since if you default on your loan, your co-signers credit will be highly affected.