Bad credit does not necessarily ruin your chances to qualify. This is a common misconception that has been erroneously accepted as fact. The FHA will look at other factors to determine if you qualify for bad credit FHA loans.
One Time Factors Can Be Overcome
Common factors the FHA will consider include if you recently had a job loss, serious illness, or transfer of job. These factors indicate that the bad credit may have been caused by one time factors that are not truly indicative of your credit history. Their recognition of these factors can be very helpful for those who have had bad credit due to these type of issues.
The regular process is the loan officer or underwriter will generally review the last two years of your credit history. For any areas where there are signs of bad credit, you will want to illustrate and show the reasons for this bad credit. For example, if it was tied to a job loss, you can show how you had a dramatic reduction in income. The key here is to show the reasons why this bad credit took place through supporting documents and explanations.
Bankruptcy and Foreclosure Can Also Be Overcome With Time
Another thing to remember is that you can even qualify for a bad credit FHA loan if you have had a bankruptcy or foreclosure in the past. However, they will require you to share that some time has passed since the event. For instance, you must show these events have occurred at least 2 years in the past for bankruptcies and 3 years for foreclosures. In addition, you will need pay off before the closing any outstanding collection amounts, judgments or charge-offs.
Proactive Measures Can Be Taken To Improve Your Credit History
If you feel based on your credit history that you cannot show good reasons why you have had some bad credit, we suggest you hold off on applying until you have a shown a more steady record of credit history. Showing them you have built up a good credit history after one year can go a long way towards offsetting previous bad patches and help show the loan officer or underwriter that you are a better credit risk than your full record might suggest.
Another good idea is to pay down and/or close one or two credit cards. Reducing the amount of credit cards can help increase your credit score. Finally, if there are any errors in your credit report, challenge those errors in writing and have them resolved prior to applying for a bad credit FHA loan.
As you can see, bad credit is something that can be worked around in a number of ways to give you a better opportunity to qualify. Bad credit FHA loans have helped many people get their share of the American dream.