FHA Mortgages and Home Loans With Bad Credit

By Michele Lerner
Mortgage Credit Problems Columnist

FHA-insured loans represent about 30% of all home purchase mortgages and about 20% of mortgage refinances, but now concern that this government-insured loan program may experience more loan defaults has led to the introduction of some changes. Borrowers with poor credit may want to apply for an FHA loan before some of these changes are implemented. Find out if you qualify for the best mortgage rates by entering your information on this page.

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Credit Scores and FHA Loans

The FHA itself has never set a minimum credit score requirement for a bad credit mortgage, but many lenders have established credit score guidelines themselves. If the proposed changes go into effect, an FHA mortgage approval will require a credit score of at least 500. Borrowers with a credit score of less than 580 will need to make a larger down payment of at least 10% rather than the 3.5% required of other borrowers. Currently, only about 1% of FHA loan borrowers have a credit score of less than 580, and lenders are already typically requiring FHA loan applicants to have a credit score above 600 or 620.

FHA Loan Underwriting Changes

Another proposed change would mean that high-risk borrowers, usually those with a low credit score or a high debt-to-income ratio, would be required to have a manual review of their credit and documentation instead of being processed through the usual automated system. Having a lender review your files manually may not necessarily be a bad thing. If you need a poor credit mortgage, there may be reasons for your poor credit score that you can explain, such as an illness or a divorce that caused you to have temporary credit problems that you are now fixing.

If the proposal is put in place, FHA loan applicants who need manual underwriting will be required to have cash reserves of at least one month's mortgage payment. Borrowers with a credit score below 620 will be carefully evaluated and overall debt payments must be 43% or less than the applicant's gross monthly income to qualify.

While FHA loans are still a good option for borrowers with less than perfect credit and these proposed changes are not expected to be in place until later in 2010 or in early 2011, bad credit borrowers should try to improve their credit. Find out where you stand with lenders today by completing the form on this page to see if you qualify for the lowest mortgage rates.



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