August 23, 2024
Credit history and FICO scores will be key factors when your FHA lender reviews your home loan application.
For first-time homebuyers, the path to owning a home can be complicated early by credit problems, and knowing to avoid some common credit pitfalls is key. We examine some of the major points below.
Prioritize Your Credit Report
FHA lenders will review your credit reports from the three major credit bureaus to assess your creditworthiness and determine your interest rate for the FHA mortgage.
New homebuyers must regularly monitor credit scores and reports for evidence of problems, errors, and identity theft. These, even if not your fault, can reduce your credit score and jeopardize loan approval.
Start by requesting free copies of your reports from the official website, AnnualCreditReport.com, and review those reports carefully.
Become More Aware Of Your Debt
Do not add new debt after applying for an FHA loan or even after pre-approval. It will affect your debt-to-income ratio (DTI), a key factor lenders consider before deciding on loan approval.
Your DTI is the amount of your monthly debt payments compared to your gross monthly income. A high DTI indicates a significant portion of your income goes toward your monthly debt. Will there be enough left over to pay the mortgage? That’s what the lender wants to know.
Generally, lenders prefer a DTI of 43% or lower, although some may accept higher ratios depending on the lender.
Before applying for a mortgage, reducing existing debts, such as credit cards, student loans, and auto loans, can gradually improve your DTI.
What To Know About New Credit Applications
Some don’t realize that applying for new credit card accounts means getting a new credit inquiry on your credit report.
This typically results in a temporary drop in your FICO scores. Due to the nature of home loan financing, this is NOT true for those applying with different home loan lenders within a short period of time (typically no longer than 3 months).
Multiple hard inquiries for credit cards or car loans within a short period can hurt your FICO scores. Avoid applying for non-mortgage credit once you’re committed to buying a home.
Hang On To Your Old Credit Accounts
Closing old credit accounts isn’t the smart move some think it is. Doing so may actually lower your credit score. This is because the age of a credit account is a factor for the lender when deciding whether to approve your loan.
Avoid Becoming A Co-Signer
When co-signing a loan, even if you’re not the primary borrower, you can be held personally liable for the debt, affecting your FHA loan application. Especially if you carry other debt. It’s best to avoid co-signing for other people when you are serious about finding a new home.
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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