Credit Rating, Missed Payments, and FHA Refinance Loans
Did you know that FHA refinancing loans are more forgiving when it comes to your credit rating? Most refinancing programs designed to save homeowners from foreclosure take into account what's happened to thousands of American homeowners during the pandemic. Your credit rating may be affected by current conditions, but if you have an overall pattern of reliable payments, you shouldn't worry about being disapproved for an FHA refi.
Do you have a more serious problem on your credit report? The FHA loan approval process for refinancing does take into account extenuating circumstances such as an on-the-job injury, illness or other situation that may have prevented you from paying on time. Don't assume you aren't qualified just because you have a period of non-payment or collections against you.
Come to the FHA refinance table prepared with a written explanation of what happened to damage your credit rating and submit it along with your paperwork. That can make quite a difference when the loan officer examines your past credit history and compares it to your current circumstances. If you need such a letter, be sure to include any supporting documentation including hospital bills from an extended stay or other evidence that supports your claim.
FHA lenders are quick to point out that a few missed bill payments on a credit report don't necessarily indicate you are a bad credit risk, but one area where missed payments creates the most trouble for borrowers is on the mortgage itself. You must be current on your existing home loan. There must be no missed payments for 12 months prior to your refinance loan application.
This "paid up" requirement also applies to what bankers call "judgments" and other collection activity against you. If you are not current on your other bills or have collection agencies to deal with, take steps you need to get caught up before filling out your FHA refinance application. You don't have to be paid in full, but you do need to be in agreement with your creditors on repayment.
Like any VA home loan, FHA mortgage or refinancing application, it's important to prepare your credit as much as possible before you apply. In addition to your credit rating check, an FHA mortgage lender will also need to check your debt-to-income ratio.
You can take steps to reduce your debt-to-income ratio by paying off small amounts on credit cards and closing credit card accounts you don't need. Don't apply for other lines of credit when you are trying to get an FHA mortgage application approved. Any potential debt may count against you when applying for a mortgage. Keep that potential debt as low as possible for best results. Start work on your debt-to-income ratio the moment you decide to apply for an FHA refinance option. The sooner you start cutting down the debt, the better.
FHA refinance loans are worked more personally than other home loan products. Work closely with your loan officer, and never assume that you aren't qualified-give yourself a chance to work with the system and you could find yourself in more affordable mortgage payments and a lower interest rate in no time. If you want to get into an FHA refinance loan but your current lender is not responsive to your needs, you don't have to refinance with the same bank. You can always use a new lender willing to work with you.
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