September 7, 2023
We get a lot of questions about preparing for an FHA loan. Some of the most popular topics? Credit scores, what it takes to get loan approval, and whether it’s good to wait out the current high interest rates we are experiencing at press time in the fall of 2023.
There are many sources of credit advice, especially advice on how to prepare your credit ahead of a major application like an FHA mortgage.
But what do the credit agencies themselves say about how to become more creditworthy ahead of a home loan application? How should you prepare?
Improve Your Chances At Home Loan Approval
There is some interesting advice from one of the “big three” credit reporting agencies, Experian. That credit agency recommends you start as early as possible, working on your credit while you are saving up for your down payment and other costs.
And while we’re talking about planning and saving, Experian.com also says borrowers should try to save more funds than the minimum for a down payment.
Borrowers are encouraged to do so even if they are qualified for the lowest FHA down payment option of 3.5%. Why?
More money for your down payment is considered a compensating factor for borrowers with lower FICO scores. However, even when an applicant’s scores are high, paying more upfront can make it easier for your lender to approve your loan and offer a more competitive interest rate.
Interest Rate Buydowns
Experian’s advice includes considering paying for interest rate buydowns, which may make your loan more affordable over time.
The credit agency notes that each discount point is “typically” worth one percent of the loan amount and buying the rate down lowers it by 0.25% per point for the entire life of the loan. If you plan on getting a home you will stay in for a long time, you may wish to consider this option.
Monitor Your Credit
That headline might be a bit oversimplified, as our advice and Experian’s both include not applying for new credit while you are working on getting ready for your mortgage.
In other words, “monitoring” is more proactive in terms of being mindful of what credit you have, and what credit you need in the future. Don’t apply for new credit ahead of your mortgage application.
Monitoring your credit also means avoiding major negative changes to your payment habits, debt ratio, and the amount of credit you carry at application time. You’ll also need to search your credit reports for errors and signs of identity theft.
Consider An FHA Adjustable Rate Mortgage (ARM)
This is advice you’ll see a lot more of as long as mortgage loan rates are between six and seven percent. It is crucial to compare this loan option with a fixed-rate mortgage.
While you may or may not choose to apply for an FHA ARM loan it is smart to consider how much you might save compared to a fixed-rate home loan.
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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