Looking into purchasing a home with bad credit? A LOT of questions about possible FHA loan?

[Anonymous]

My wife and I have been looking into purchasing a home. We are living in Michigan, and recently a ton of very low priced foreclosures have popped up. We expect to have about 25000 and were planning on purchasing a home, and then saving up more to fix it up (obviously it will be a fixer-upper). Recently, I just took on a new job, making a substantial pay income increase, and we have just begun looking into the possibility of a FHA loan. We both have very bad credit, and never thought that obtaining any type of loan was even fairly possible. We are holding off a couple months, seeing if fixing our credit (if possible) is the best way to go.

My credit score currently is at about a 571.

I am contacting a few of my debtors to see if they will do pay for deletes. (if they decline, will this hurt my credit? and is it still worth it to pay them off to show the paid on the report?)

I have recently looked into getting a secured credit card to build my credit, as I have nothing new on there for a few years. All of my negative credit is from a few years ago. Some of it should be falling off within a year to a year and a half (will it hurt me too much to leave this credit alone?)

I have also read that for an FHA loan you need to have solid employment for two years. I started my job last Febuary, and am switching jobs in a week or two. I have heard that you can possibly submit a letter explaining your gap of employment. My father was severely sick with cancer, and I took him in and cared for him personally (not sure if this will count for an accepted reason?)

I am wondering what the liklihood of spending money to pay off my credit will help me to raise my score enough to get an FHA loan in the near future, or if sticking with the cash idea is best. Obviosuly, the house we are able to get with a loan will be in much better quality.

Not sure if these numbers matter- but I will be making 70k and we are looking for a home for about 125000. I do not have a car payment or any curernt debt payments (everything is old), besides for the secured credit card I am looking into.

Last question- my wifes credit is worse off than mine. She also has a substantial amount of student loans to her name, and is still in school. Is it possible for me to get a loan strictly in my name, not having to run or even look at her credit while we are married?

[llecs]

Welcome to the forums!

I'd suggest reading the following:

Common Abbreviations

Credit Scoring 101 - great for knowing what is in your credit score and to see how your score is impacted.

What Steps Do I Take - great for learning the repair process.

and Example letters - PFDs, GWs, DVs, etc.

Make sure the 571 score is a FICO score. Many websites offer credit scores but vitually all of them are not FICO scores. You'd want to know all 3 credit reports very well before applying for a mortgage. YOu can get your EQ FICO from here (same as what your lender would pull) and a TU FICO (likely not the same as your lender's pull, but possible). You cannot buy your EX FICO from anywhere. Your lender will pull all 3 reports and all 3 FICO scores and take the middle score of the three and use that for a basis of approval. If applying with your spouse, they'll look at both middle scores and take the lower one as a basis for approval.

Before you app for a mortgage, Opt-Out of your CRs! There's a URL somewhere...optoutprescreen...or something like that. It'll automatically opt out of all 3 reports. This prevents the CRAs from selling your info to undesirables like CAs. It's not uncommon to see posts in here of a CA appearing right after applying for a mortgage. This is usually due to the CRA selling the fact you applied for a mortgage. Once CAs get that info, they'll typically report in the middle of your approval process knowing that your underwriter will require you to pay it in order to be approved. Opting out prevents the flow of info to the CA.

The risk is very low in sending PFDs and their denial very likely will have no impact at all on your credit. I had one creditor deny me over 100 times before they said yes and never had an issue. Some are stubborn.

If you already have open accounts and a FICO, don't add more credit, especially if you want to apply soon. Give yourself 6-12 months after you open a new credit account before applying for a mortgage.

Aim to get your CAs and COs off. They'll hurt until the very end. Be shy about wanting old COs removed, though. Even if a baddie, the age could be helping. But be 100% prepared to have all debts paid off befor eapplying for a mortgage. YMMV on what your lender requires.

For quetions on employment history, applying jointly or individually, and joint credit obligations, I strongly recommend posting as a separate question within the Mortgage Loans board.

[Anonymous]

Thanks for your answers! The only questions I had further along that is you recommended not to open any more credit cards. All of my accounts are closed. I currently have no revolving accounts. Would it be wise to go with the secured credit card to show new credit?

[llecs]

If all of your accounts are closed, and reporting as such, you might not have a FICO score at all. One of the requirements for FICO is that at least one open undisputed account has to be reporting for 6 months. Definitely worth checking your FICO to see if that's the case. That might impact your approval odds, but there are alternative checks available by lenders for folks with thin files. And there's no doubt your FICO would improve once one reports if you do have a FICO score now. Some lenders don't like apps leading up to the mortgage pull. Based on what you posted, and if I was in the same situation, I would open up a secured CC or two and wait as long as possible to app.

[themeggerz]

Just jumping in to tell you that an FHA loan has to be for a home that can be inspected.  This is NOT a "what is wrong" with the house inspection (thats on your dime) but the house must meet basic requirements. IE: NO chipping paint outside, NO chipping paint inside including on window sills, NO water damage, heating system MUSt be functional.... 

The HUD website can provide you more:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/ref/chap1

Or google "VA or FHA mortgage loan appraisal requirements"

But in general, VA loans and FHA loans are NOT for fixer uppers. You may qualify for a USDA loan in that case, if its a rural area.