June 3, 2024
Many borrowers worry about their credit scores ahead of an application for an FHA home loan, and it’s hard for some to gauge whether they have sufficient credit to get a loan approved.
FHA loans have more forgiving credit requirements, and borrowers should not assume they do not qualify for a home loan without discussing their circumstances with a participating lender.
When is a low credit score too low? FHA home loan rules specify that the lender must ensure a 500 FICO score (the very minimum) to qualify for an FHA mortgage, but your credit score numbers don’t tell the whole story.
Lender Requirements For Home Loan Approval Vary
You may read that FHA loan rule minimums for FICO scores do not always reflect the participating lender’s credit score requirements–this is because your lender is free to require a higher credit score as long as doing so is reasonable for that type of home loan.
Under FHA loan program rules, borrowers are technically eligible for an FHA mortgage with the lowest possible down payment if they are applying with FICO scores at 580 or higher.
But your lender may require a credit score of 620 or higher for the same applicants. That is one reason why you should shop around for a lender–standards vary.
Low FICO Scores And Credit Age
A borrower with a low FICO score doesn’t always have these low scores because of financial mismanagement, late payments, or other problems.
Your credit report can suffer when you have not used credit or have used credit for only a short period before applying for a home loan. Some people prefer to pay cash for their computers, cars, or cell phones.
That does not mean the lender automatically views you as a bad risk for a mortgage loan. Do you have past credit mistakes? While your credit record reflects those mistakes, it’s not necessarily a deal-breaker. The time that has passed since your mistakes will be very important.
Compensating Factors
What can help get you closer to loan approval when there are issues with your credit? Compensating factors such as a bigger down payment.
In such cases, the lender will want to know how much more of a down payment you might be willing to make above the minimum–a 10 percent down offer is often good enough for many borrowers.
Other compensating factors can help; if you have “substantial cash reserves,” you should let the lender know the nature and amount of such reserves, as they could affect loan approval for marginal FICO scores.
This is true because your assets are an important part of your financial picture. A borrower with lower credit scores but more assets and high income is considered stable and reliable, and other factors may be surprised at how flexible the participating FHA lender might be, but it all depends on those added factors.
If you have a marginal credit score or are worried that your scores are not high enough, you also can improve your chances at getting a home loan approved by making 12 months of on-time payments on your debts before trying to get an FHA home loan.
Avoid opening or applying for new lines of credit, and avoid canceling your cards or increasing the balances on those cards in the 12 months leading up to your loan.
Lower your credit card balances (a good goal is to get your balances below 50% with 30% being ideal) and try to save more money for a higher down payment in the 12 months leading to your application.
The better prepared you are for the loan, the more confident you will be in the application process. Take the time to get your credit ready, you’ll be glad you did.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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