FHA Loans and Bad Credit – What You Need to Know

I often get questions about different circumstances and what the time frames are for past credit issues. Let’s do a comprehensive review on FHA Loans and bad credit. FHA offers purchase and refinance loans to new and repeat homeowners. If you do have past troubles with credit these items are reviewed upfront before your loan goes to the underwriters. The answer isn’t necessarily “no” you can’t qualify most often it just depends on the length of time the issue has passed. What is your current financial situation and are you a risk to the lender are things we will identify. With a risky payment history, the bank will look at a total evaluation to determine the likely hood you will repeat or default on the new loan.

home loan

No Credit History

Most lenders will have a 2 tradeline requirement minimum to qualify for an FHA Loan. While some clients with limited tradelines might be able to use alternative forms like rental history, utility payments, insurance.

Late Payments

During the upfront review process a review of your credit report will help identify any late payments and the cause. Past late payment will generally be overlooked with a recent on-time payment history. Loans won’t typically get approved with current accounts being paid late. You’ll want to make sure you clear this up with months of proven on-time payments before you apply.

Chapter 13 Bankruptcy

The standard waiting period is 2 years from the dismissal date. Make sure this is the date signed off by the judge with executed documentation. Often the Chapter 13 process can take months to be finalized – its that final date the lender will use to ensure the 2-year waiting period has been met.  You must have also established on-time payments from that period. The banks will not approve a loan with late payments after a Chapter 13.

Chapter 7 Bankruptcy

Because of the severity of a Chapter 7 the waiting period is 2 – 3 years depending on the loan profile from the dismissal date (varying on the lender). Like Chapter 13 the lender will review the dismissal date signed off by the judge. On-time payments are a must after this and often time you will need that waiting period for your credit scores to heal with new credit established.


A 3-year timeframe from the date of the paid sale by the bank is the minimum requirement. There are extenuating circumstances that may be approved however, I’ve never seen the lender approve any of these as they are case-by-case.

Collections, Judgements, Student Loans, Federal Liens

This varies from lender to lender but, typically we can omit charge off accounts, medical accounts, and profit/loss tradelines. Student loans and federal liens are where it gets sticky and there is generally no room to sweep these under the rug. If delinquent they will need to be settled and paid up. Collections allow for some leniency and our general rule of thumb entails a cumulative total of over $2000 we will take a 5% payment against this amount towards your debt ratio.

Some items we can get around and some we can’t it all depends on the severity of the credit issue. In most instance if we can’t help, we can get you on the right track with advice or credit repair. FHA is a great program for first time home buyers with great rates and a low down payment of 3.5%.

Written By: Steve Head / Top Producing Loan Officer / https://www.txpremiermortgage.com/

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