March
23
,
2021
There are many borrower questions about how to get approved for a home loan. One variation on a common theme is, “Will I qualify for an FHA home loan even though I have a bankruptcy / foreclosure / repossession on my credit record?”
It’s good to be concerned about such issues. After all, the lender will be, and having a major negative credit event on your record can be a problem. But what DOES it mean to have a car repossessed, a foreclosure, etc. ahead of applying for a mortgage loan?
Credit Problems May Be Reviewed on a Case-By-Case Basis
Even with a bankruptcy filing, there is no generic approach to a borrower’s credit problems because they are all based on individual circ*mstances.
If you have credit problems in your past, the lender will address those in some cases by asking for written documentation from you detailing the credit issues and explaining how things were resolved.
The lender’s request in this area isn’t punitive and does not mean an automatic “no” for your home loan. What it does mean is that the lender is willing to look into your circ*mstances and make a determination based on the documentation.
Credit Problems May Be Circ*mstantial
Getting your FHA lender to take you seriously as a borrower when you have had past credit trouble depends on certain factors; being able to show the lender your credit troubles were caused by circ*mstances beyond your control, a demonstration of good credit use since the negative credit incident, and the nature of your credit issue in general.
Time Is Often the Key
Yes, it IS possible to get a home loan approved for an FHA mortgage in the aftermath of a foreclosure, repossession of a car, bankruptcy filing, etc. But the sooner you apply after one of these credit events, the worse your chances of getting the loan approved may be. The longer you wait (a minimum of one year at the very least) after a bankruptcy is discharged or a foreclosure settled and out of the borrower’s name, the better.
Certain negative credit events actually require a mandatory waiting period before you are allowed to apply for another mortgage. Foreclosure and bankruptcy may, depending on circ*mstances, require at least 12 months, more often 24 months or longer.
You will need to ask the lender about this waiting period requirement as the actual length of time may vary depending on the lender, circ*mstances, and how your credit has been utilized in the meantime.
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FAQs
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan. The FHA prioritizes the well-being of borrowers and aims to ensure that the homes they finance are safe and healthy environments for residents.
What would disqualify a home from FHA financing? ›
The FHA says that examples of such problems include but are not limited to the following: Missing handrails. Cracked or damaged exit doors that are otherwise operable. Cracked window glass.
What causes an FHA loan to be denied? ›
Despite the lenient FHA loan requirements, it is possible to be denied. The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What will cause a house to fail an FHA inspection? ›
Either the seller will have to tend to these repairs or the buyer must pursue alternative funding options, such as an FHA 203(k) Loan. Common issues that may result in a failed inspection include: Heating, plumbing, or electrical issues. Leaking, damaged, or inadequate roofing.
How often do FHA loans get denied? ›
Conventional Loans: In 2022, conventional loans had a denial rate of 7.6%, significantly lower than the FHA's 14.4%. Conventional loans, not backed by the government, typically have stricter credit and income requirements.
Why do realtors not like FHA loans? ›
Unfortunately, sellers often perceive the FHA loan approval process as risky because of the FHA's relatively lenient financial requirements and stricter appraisal and property standards.
What are red flags for an FHA loan? ›
An FHA red flag is any safety hazard, health hazard, or deteriorating element of a home that would jeopardize financing. While one red flag might be linked with a home's backed-up sewage system, another home's red flag might be a crumbling foundation. At best, an FHA red flag can slow down the closing process.
What won't pass an FHA appraisal? ›
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Can an FHA loan be denied after closing? ›
Your loan can be denied anytime from the point of application to the point of closing. However; at closing' and 'after closing' differ in that at closing, the final documents are yet to be signed. Therefore, cancellation is still possible if the lender finds that you no longer meet some requirements for the loan.
Why are FHA loans so hard to get? ›
Borrowers must meet certain requirements to qualify for an FHA loan. For example: The home you consider must be appraised by an FHA-approved appraiser. You can only get a new FHA loan for your primary residence, which means it can't be an investment property or second home.
The FHA's three requirements are that a property must be safe, secure, and structurally sound to qualify for one of their loans. Properties cannot have adverse conditions that might imperil the homeowner, and must meet proper building codes. As a buyer, these standards protect you from buying an unsafe property.
Why are sellers not accepting FHA loans? ›
The largest concern sellers have with FHA loans is the appraisal/inspection process. FHA loans have the reputation of having strict requirements for appraisals and inspections. The FHA has what they call 'Minimum Property Requirements,' if a property doesn't meet even one of them, financing falls through.
What flags an FHA inspection? ›
Structure Quality. The overall structure of the property must be in good enough condition to keep its occupants safe. This means severe structural damage, leakage, dampness, decay or termite damage can cause the property to fail inspection. In such a case, repairs must be made in order for the FHA loan to move forward.
Who is not eligible for a FHA loan? ›
Credit Score & Down Payment Requirements for FHA Loans
Those with scores below 500 are not likely to qualify for an FHA loan. Borrowers must have at least two established credit accounts such as credit cards or other monthly payments, in order to prove responsibility with debt.
Are FHA inspections hard to pass? ›
Passing an FHA home inspection is harder than passing other types of home inspections because if the inspector identifies serious problems with the property, those problems will have to be dealt with before you can secure a loan.
Is it hard to get approved for a FHA loan? ›
In general, it's easier to qualify for an FHA loan than for a conventional loan, which is a mortgage that isn't insured or guaranteed by the federal government. Here are some key differences between FHA and conventional loans: Credit score and history: FHA loans allow for lower credit scores than conventional loans.
What is the denial rate for FHA loan? ›
Here's how it breaks down. Federal Housing Administration loans: 14.4% denial rate. Jumbo loans: 17.8% denial rate. Conventional conforming loans: 7.6% denial rate.
Can an FHA loan be denied after pre approval? ›
It's rare — but still possible — that loan requirements can change after a pre-approval is issued. Let's say that you applied for a home loan that allows a credit score of 620, and you're good to go because you have a score of 630. But then they move the goalpost, and now you need a credit score of 640.
