Work with an FHA lender to solve credit problems

By Michele Lerner
Mortgage Credit Problems Columnist

Whether you are a prospective home buyer or a homeowner who wants to refinance your existing loan, you'll need to meet the guidelines established by the Federal Housing Administration and your mortgage lender if you want an FHA loan. Requirements for an FHA loan are generally looser than guidelines for conventional financing, but that doesn't mean you can automatically qualify for a bad credit mortgage loan. In fact, FHA loan requirements have tightened over time because of concern that too many FHA-insured loans were going into default and that there were too many FHA loans being guaranteed by the government.

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According to Ellie Mae's April 2013 Origination Insight Report, 20 percent of all new mortgage loans in the first quarter of 2013 were FHA loans.

Qualifying for an FHA loan:

FHA lenders will review your credit history, your income and assets, your job history and the value of your home (or the home you want to buy) before approving a loan. In addition to documentation that proves you have some assets in the bank and a steady job, lenders will look closely at these two factors:

Credit score - While the official FHA guidelines say that you need a credit score of 580 or above, very few lenders qualify anyone for an FHA loan unless their score is 620 or 640 or above. In fact, according to Ellie Mae, the average credit score for an approved FHA loan in the first quarter of 2013 was 713 for a refinance and 698 for a purchase loan. The average credit score of borrowers who were denied an FHA loan was 671 for a refinance and 669 for a purchase loan.

Debt-to-income ratio - If you have debt problems, your minimum payments on all your debt may be too high compared to your gross monthly income. FHA lenders typically require an overall debt-to-income ratio at a maximum of 43 percent. In the first quarter of 2013, the average debt-to-income ratio for refinance loans was 38 percent and 41 percent for purchase loans. The average debt-to-income ratio for loans that were turned down was 44 percent for an FHA refinance and 45 for a purchase loan.

Enter your information on the form on this page to get the lowest mortgage rates and to find out if you qualify for an FHA mortgage. Consult with a lender even if you don't qualify right now, because a good lender can show you ways to improve your credit for a future FHA loan qualification.

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