November 7, 2012
A reader asks, “My husband and I have been trying to get approved for a home loan since august and keep getting denied. His credit is OK but my score is in the high 5s. I believe we have more than enough income to afford a house but dint know what else to do. Please help with some information on how we can get approved or how.”
Questions like these have tough answers for some borrowers because the answer is basically that a credit score in the “high fives”, which we interpret to mean a FICO score in the high 500 range, isn’t good enough for many lenders in the current lending climate. While FHA does have more lenient FICO score minimums, many lenders don’t observe those bare minimums. The average for most lenders is 620 or higher. Some financial institutions may require scores of 650 or better, depending on the housing market.
What is an FHA loan applicant in this situation to do? The first step is to contact the FHA directly (1-800 CALL FHA) and ask to be referred to a housing counselor or pre-purchase counselor in the local area. FHA borrowers with low credit scores should get COUNSELING about their credit, rather than paying a third party for “credit repair”. A reputable housing counselor will tell the borrower what to do in order to improve his or her chances of getting an FHA loan approved–companies that offer to “fix” your credit for a fee are essentially in many cases having you pay for things you as a consumer can do yourself.
What is that advice the housing counselor will give you? First, a good look at your credit reports–order them from Equifax, TransUnion, and Experian. Challenge any erroneous or outdated information (older than seven years in most cases) and ask the credit reporting agency rep how to do so for that company. This process takes time–don’t expect to get loan approval within weeks or even months in some cases when contesting your credit report details.
Next, work on establishing at least one year of on-time payments. Missed payments are a bad sign to the lender–for an FHA home loan at least 12 months of reliable bill payments are needed. Finally, reduce your debt-to-income ratio. Work on eliminating unneeded lines of credit and freeing up more disposable income that can be used to make mortgage payments.
A reputable, FHA-referred housing counselor can give more more detailed advice on these and other issues. When you are ready for a new FHA home loan, you can pre-qualify at FHALoan.com and start your journey toward owning a new home. (FHALoan.com is a private company and not a government agency.)
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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