April 25, 2022
How can a new borrower prepare for a home loan application? There are some important steps to take and not all of them are as obvious as others.
For example, do you know where your down payment money will come from? If you are still trying to figure out how to budget and save for it, you might consider investigating local down payment assistance programs in your area.
But there are other things to do before you turn in a home loan application.
Check Your Credit Use
That’s a no-brainer, right? But there are issues you should consider when examining your credit that may not be so obvious.
For example, some first-time homebuyers don’t realize that it’s not just your credit scores, but also your credit utilization that gets scrutinized by the lender. What does that mean?
It means that if you carry balances well below the 50% range for your credit limit, the lender will view that as better credit utilization than if you carry balances above 50%. Actually, ideal credit utilization is 30% of your credit limit or less on all accounts.
But that sounds daunting to some borrowers and the idea here is to get you to consider how much of your credit limit to use and how much to pay down.
Under 50% of your credit limit is a good goal to start with, and you’ll want to lower your balances on as many accounts with a credit limit as possible to reap the benefits of good credit utilization.
Do Some Math
Review your FICO scores and compare them to the FICO score requirements for multiple lenders. Do this as early as possible in your budgeting and planning stage of the FHA home loan.
Why?
The goal here is to see what interest rates you might qualify for with your existing credit limit and how much improvement might be needed in your FICO scores to qualify for lower rates and a more affordable loan.
Some borrowers are only a few FICO score points away from a better deal, while others may have to work a bit longer to improve to the point where lower rates might apply.
Doing this research as early as possible gives you time to work on improving your credit through on-time payments, lower debt ratios, and improved credit utilization.
Give Yourself More Time Than You Think You Need
When you’re reviewing your credit you may find things in your credit report you don’t recognize. If that’s true, getting to the bottom of the issue may take longer than you think.
That’s especially true if you discover identity theft or errors in your report. Disputing those takes time and you will want to be as close to full resolution of the issue as possible before you begin the actual process of filling out a home loan application.
Ask any participating FHA lender for advice on this issue–you’ll see that it may be best to wait a bit longer and have your issues fully resolved than to risk having your loan application stopped in its’ tracks because there is ambiguity about the resolution in the meantime.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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