Need help preparing for FHA process, I have shaky credit

[Anonymous]

I posted this on the building credit page, but thought I could get help here also.

Hello everyone, like many of us here I went through some rough times. Long story short, I was faced with sudden medical issues which forced me to use and max out my credit cards. I tried to keep up with minimum payments but it got overwhelming and no longer affordable so they did chargeoff. Some time has passed, I have a beautiful wife and 2 lovely kids, my dream is to buy them the home they deserve. In the last few months I have been working on improving my credit. I opened 2 credit cards (Capital one QS1 $400 limit & Platinum card-$500 limit). I been making each and every payment on time paying off my entire balance, I also opened up a electronic store installment loan and paid the entire balance off in 3 months (was a 12 month agreement). I live in the norther part of Texas, if you live here then you know how quickly houses are selling and going up in price. Our plan is to go the FHA route, I'm sure a conventional loan will be way out of the question for some time. With that being said, I want to get help on improving my credit, we are aiming for 2 years. I have attempted to talk to some lenders, but it seems like they get bothered to talk to someone in my situation. As soon as I mention my shaky credit they basically just run me off the phone. I was hoping a real lender could go over my profile and basically give me some guidance and advice on how to prepare for the mortgage process. So, I turn the myFico community for help, I will admit I have a lot of pride and did not want to post but feel like I need to suck it up and swallow my ego.

Below is my profile:

Fico Scores:

Equifax Fico8 - 575

Experian Fico8- 586

Transunion Fico8- 755 (I'm also surprised)

Mortgage Fico scores:

Experian mortgage fico score- 576

Transunion mortgage fico score-763

Equifac mortgage fico score-601

What I believe is hurting me are the following old account:

- Discover BankDiscover Bank-Charge off-$535-On record until 02/2021

- American Express-Says it's 108 days past due, I haven't made a payment since 2014-$102 balance

- Chase-Charge off-$1896-on record until 02/2021

- BOA-Charge off-$1180-on record until 09/2020

- Midland funding- collections-$435-on record until 12/2021

- Midland funding-collections- $470-on record until 12/2018

I'm willing to pay off all my chargeoffs, but have read a lot of conflicting information. I have read there is no point to pay them off as I'm past the SOL on all, and that it will hurt me more. I have also read that paying them off will initially hurt but then bring up score. I know this is a lot of information, I just want to get some advice. In reading some of these threads, I feel there is hope, a lot of patience will be needed but I feel like I'm setting a realistic goal.

[Anonymous]

I'm sure there will be much more knowledgable people who can offer more insight, but Midland Funding has a policy where they will delete paid collections if they are 2 years or more past the date of first deliquency. If you search midland Funding in the Rebuilding Credit forum you'll see a lot of posts stating this.  I even had one that got deleted after I paid it.

I would definitely pay the American Express, as I'm assuming that is reporting late each month. I'm guessing that a mortgage company might want you to pay off any charge off's that are still on your credit report, so it may end up being a timing thing. I believe you just need a 580 middle score for FHA (I'm not sure... I'm a veteran so I used the VA loan), since you already have that (601)  I would start with getting those 2 collections paid and removed and see where that takes your score. 

Good luck!

[NC_Mtg_Loaner]

The challenge you have here is quite common.  To pay or not to pay, that is the question. 

There isn't any real concrete answer that is right or wrong, but lenders typically like to see all accounts paid in full with no derogatory information or balances due.   Generally speaking, past history is indicative of future behavior so this is why lenders proceed with caution.  While medical collections can be overlooked / excluded it's the past credit that was utilized and unpaid that could continue to haunt you.

I often ask the consumer which data would you rather have reporting in your file?  Derogatory with balances owed or paid with $0 balance. ?

Your score and history will improve over time whether you pay these back or not, but while they go unaddressed you run the risk of them getting worse as they most certainly won't get better if you ignore them if you ask me.   And while you may not have $5000 saved to begin paying these creditors back you could actually begin paying a couple of these creditors $50 per month and they might be satisfied in a very short period of time....or at least can no longer report as derogatory once 4 regularly monthly payments have been made.   

This also gives you time to keep saving for your down payment, closing costs and retirement as well as emergencies since you don't want to begin life as a home owner without additional money saved for emergencies....

[Anonymous]

I'm in the process of trying to get my scores up as well for a FHA mortgage and the lender I'm working with is having me try to get to at least a middle score of 620. He said it would be ideal if I could get to a 640 as then I would have a better chance getting through underwriting. The thing that has boosted my score the most is getting my utilization down on my credit cards. I have 3 total, 2 show a zero balance and one is reporting at 9%. I know that FHA states a minimum score of 580 but the research I've been doing it's near impossible to get a loan with that low of a score. Some charts show only 2-3% qualify for a mortgage from that low of a score.

[Spider07]

I would also work to find an FHA lender that does not use overlays.  They are out there and might help you in your situation.  If you find one, they can direct you one what you need to pay and or not pay to qualify for an FHA loan.  FHA may not require you to pay off your chargeoffs but most lending companies have overlays and they will require it even though the FHA does not. 

[Anonymous]

I been looking around, but I think it's near impossible to work with a lender who has no overlays. I actually want to pay off my chargeoffs, I want to prove I'm not un-responsible. I just don't want it to hurt my credit in the process as I don't want to delay getting a house any more.

I plan 2 years, I want to pay all chargeoffs by August and then use the rest of the time to save up for a down payment and to build my credit. I have read the home buying experience is horrible and I would prefer to have all bad reports paid off to prevent any surprises

[Anonymous]

I just closed on my home in December 2017 and at the time of my application in February 2017 I had 7 charge-off's/collections. 

My starting mortgage scores were in the 500's. What is going to help you is getting the charge-off's to a closed status and showing a $0 balance. If those accounts are providing updates on your report every month, it's holding your scores down. In my experience, I did NOT need to pay the amounts in full. When calling the collectors, I was told that if I settled, I could get them to show as a closed account with a $0 balance. Of course it still included the comment, "paid in full for less than full balance" or "settled in full for less than full balance". My lender's theory was that the damage was already done by having it report as a collection/charge-off so just do what it takes to have it show a $0 balance. I'll also had that I had student loans in default and had to take care of that as well. 

I also had 4 collections that were close to hitting the max time allowed of reporting so I called the credit bureaus and was able to get an early exclusion to where they removed them from my report. 

I also opened a secured card with NFCU for $1,000 in March 2017. Because of all the changes with my credit and my score increasing, the card unsecured in September 2017 and I was given a $2,000 balance and my $1,000 deposit was returned. I also had myself added as an authorized user to my husband's CapOne card since he had it for 3yrs and had 100% perfect payment history. 

We had to re-submit paperwork in September 2017 as we bought a new construction home and my lender was very surprised that I reached a goal of having a mid-score in the 640's. Underwriting was a breeze and the only thing they came back with was wanting to source where the down-payment was coming from since I used my 401K. 

[Anonymous]

^^

This is exactly what I needed to see, thank you so much for taking the time to respond as your situation pretty much reflects mine. I'm going to take care of these asap

[Anonymous]

If you are in North Texas I have found 2 lenders with no overlays, that could help you.

[VALoanMaster]

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@Anonymouswrote:
^^

This is exactly what I needed to see, thank you so much for taking the time to respond as your situation pretty much reflects mine. I'm going to take care of these asap

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What Rookie 08 said is pretty much on the money. The main thing is to see which accounts are currently reporting & start with them. The charge-offs offer a great opportunity to boost your scores even if you don't pay them in full. Here's why. A charge off is a derogatory status of an account so, if you change that status to paid off, it changes from a derogatory status to a positive status.  This is different than a collection account because the account itself is derogatory so the only way to improve your scores is to get the collection account deleted.

I'm in central Texas & have FHA with no overlays.