Do You Qualify to Buy a HUD Home?

If you buy a HUD home, you will probably use an FHA loan. FHA loans are the easiest to qualify for and HUD FHA loans have the lowest down payments and the best interest rates. In order to qualify for an FHA loan, you will need good credit and enough provable income.

What is "Good Credit"?

HUD says, "Past credit performance serves as the most useful guide in predicting future credit performance."

• A 2 year record of being up to date and on time on all your obligations is considered very good credit.
• A period of financial difficulty in the past does not disqualify you if a good payment record has been maintained since.
• No credit does not disqualify you if you can show a good payment history for other things such as rent, utility bills, lay away plans, insurance, doctor bills, child support etc.
• All credit problems are noted, but problems with housing obligations and installment debt such as car payments and student loans hurt the most. So if your housing and installment debt history is good but you have some small unpaid obligations, you should be OK if you're willing to pay those off.

Student loans

Delinquent student loans must be paid off or refinanced or brought up to date and paid on time for one year.

Court judgement

Judgements automatically disqualify you unless you pay them off or the creditor agrees in writing to subordinate it's claim to your new house loan.

Collections

Collections don't disqualify you automatically, but they sure don't help you. If you don't pay them you will need to make a strong case for your side of the story.

Previous foreclosure

This requires a three year wait unless the cause was the death of the principle wage earner. That requires a two year wait. Good credit during the wait is required.

Bankruptcy

Chapter 7 Requires a 2 year wait and good credit during the wait. One year is required if the cause was the death of the principle wage earner.

Chapter 13 Requires court permission to buy the house plus 12 consecutive on time monthly debt payments plus good credit on other obligations.

Tax liens

Federal and state tax liens must be paid or you must have a written payment plan with the government.

Divorce

If you are divorced and your name is still on a previous house note, you are OK if the divorce decree gave your X the house payment responsibility and you gave your X a recorded quit claim deed for your ownership share.

Co-signer

A co-signer such as a parent or other close relative can help if they have good credit and enough extra income to help you qualify.

Remember that your credit history must be acceptable. If not, you can't be on the loan. If you are not on the loan, you can't buy the house.

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What is "Enough Income"?

There are two income tests:

• Test One  It is good if the total payment on your new home is less than 30% of your gross monthly income.
• Test Two  All existing debts that will take more than 10 months to pay off must be counted.

Take the total of those debt payments and add in your new house payment. It is good if this new total is less than 42% of your gross monthly income.

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What is "Provable Income"?

You must have at least a 2 year work record unless you just got out of school and your new job is in your field of study or you took time off from a career and you have been back at work in the same field for 6 months.

All income that is counted toward qualifying must be expected to continue at least 3 years. It is good if your income is steady or is going up.

Overtime & Bonuses

These will be counted if you can show 2 straight years' worth and it looks like it will continue. One or two years is sometimes OK.

Part Time Income

Part time income will be counted if you can show a 2 consecutive year record and it looks like it will continue. One to two years is sometimes OK.

Commission Income

This will be counted if you can show 2 full years' federal tax returns and a recent paycheck or stub. If you switched from salary to salary plus commission then you need only one full year federal tax return if your job didn't change and your total income didn't decrease.

Child Support

This is counted if you can prove it has been paid for 12 consecutive months and it will continue 3 more years.

Self Employed

Self employed borrowers need two full years' federal tax returns that show enough net income to qualify. If you are a sole proprietor your net income is line 31 in the federal return (Adjusted gross income) plus depreciation and business car miles at $0.121/2 per mile. If your company is a corporation, your W-2 is your income. Your corporations net income will be credited to you according to your share of company ownership. One full year's self employed tax return is OK if your previous 2 years' type work was the same as now or you were in school studying your trade for one of those previous two years.

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