FHA Loan Requirements

FHA, or Federal Housing Administration, provides mortgage insurance on loans made by private, FHA-approved lenders.

In some cases, FHA may allow lenders to accept loan applications from people that may present greater risk in their financial history as reflected by lower or poor credit scores or a limited credit history. For people with better or good credit, FHA is an option to consider if a low downpayment is required for purchase.

In the case of every loan application, before a borrower gets approved, the lender will take certain measures to analyze and understand the applicant’s credit history.

Full understanding of a borrower’s financial background allows the lender to assess how likely they are to be a good fit for an FHA mortgage loan. A history of on-time bill payments will help position a borrower for approval. On the other hand, if a potential borrower has a poor or bad credit history that reflects a high amount of late or non-payments, this person is deemed as having poor financial judgement and may or may not qualify when it comes to approval.

FHA insured loans require mortgage insurance to protect lenders against losses that result from defaults on home mortgages.

Home Loan Planning Resources

Because of that insurance, lenders can — and do — offer FHA loans at attractive interest rates and with less stringent and more flexible qualification requirements.

Home Loans and Credit Scores

Depending on what your credit profile looks like, a loan applicant’s FICO score will dictate what your down payment will be. Generally speaking, a FICO Score of 580 or higher will allow for a 3.5% down payment amount. If your FICO Score is lower than 580 a borrower may expect to pay something that is typically closer
to 10% down.

  • It is easier to qualify poor credit applicants for FHA loans.
  • Bankruptcies and foreclosures may not disqualify an applicant.
  • Limited or no credit history may not disqualify a borrower.
  • Lower fees may be granted with FHA insured loans.
  • Borrowers often enjoy competitive interest rates.

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Credit Score Basics

Your credit score is a benchmark measure of your creditworthiness.

Your score tells potential lenders, based on industry research and the credit histories of millions of Americans, how much risk you pose to a lender, that is, the likelihood you’ll default on your loan. The higher your creditscore, the less risky mortgage lenders will consider you to be, and the more likely you’ll be
approved for a mortgage.

Continue reading to learn more about your credit score, how it’s calculated, and how you can boost it to increase your chances of being approved for a mortgage

There Are 3 Credit Reporting Bureaus

Equifax, Experian, and TransUnion are the three credit report bureaus that monitor American’s credit. However, each of these organizations will typically provide you with a slightly different credit score.

These agencies use what’s called a FICO score (which stands for Fair Isaac Corporation) as your credit score. Each of these agencies will have a current credit report on file for you, but your FICO score and credit history will most likely be slightly different on all three reports. This isbecause they are separate organizations getting data at different times, and using it to determine your creditworthiness.

What is Good/Poor Credit?

The higher your credit score, the less risky lenders will view you. This means the higher your credit score, the more likely you’ll be approved for a mortgage.

The breakdown of credit scores and what’s considered “good credit” or “bad credit” is:

  • <580: Poor credit
  • 580-669: Fair credit
  • 670-739: Good credit
  • 740-799: Very good credit
  • 800+: Excellent credit

Why Are My Balances Owed Different on Each Credit Report?

Equifax, Experian, and TransUnion work in the same industry, but they are separate organizations. They receive your credit data at different times and update your credit report accordingly.

Sometimes, this means that the balance owed on a particular piece of debt, such as a car loan, might be different on all three reports. If you notice discrepancies, you can contact the credit bureau showing an incorrect balance and provide them evidence, such as your most recent monthly statement from your car loan, so that they can update your credit report accordingly.

Can I Use My Wife's Credit Score for Loan Qualifying if Her Score is Higher?

When you’re applying for a mortgage with another applicant, whether it’s your spouse, unmarried partner, or another friend or family member, your mortgage lender will look at both of your credit scores. Additionally, your mortgage qualification will be based on the lowest score between the two of you.

If you and your co-applicant have vastly different scores or one of you has a bad score, there are a few options you can take to securing a home loan. First, you can focus on raising the lower score as quickly as possible, which is best done by repaying all debts on time, paying off any collections or judgments one of you may have, and providing documentation of all of this debt repayment activity to your potential lender.

Another option is for the person with the highest credit score to be the only person applying for the mortgage. Even if you go this route and have only one person on the mortgage loan, you can still work with your lender to make sure that both partners are listed on the house’s deed

Should I Close Accounts On My Credit Report? Will That Raise My Score?

Some people think they can raise their credit score by closing accounts they don’t use, such as credit cards with a zero balance or credit cards they pay in full every month. However, doing so may actually cause your score to go down!

Among the various items factored into determining your creditworthiness is how long you’ve hadcredit. A long credit history showing on-time payments makes you look less risky to lenders. If you close an account you’ve paid diligently for years, you lose all the good credit associated with that account.

How Often Does My Credit Score Change?

Your credit score is constantly changing as your interaction with debt and credit changes. Specific actions that may cause your score to increase include:

  • Making on-time payments for all open accounts.
  • Paying off any collections or judgments.
  • Paying off a non-revolving debt, such as a car loan.

 

Other activities cause your credit score to drop. These include:

  • Applying for new credit with anyone.
  • Making a late payment.
  • Paying less than your minimum payment on any open account.

Check Your Credit Score Now

Before you go house hunting, you should check your credit score to see where it ranks. Checking your credit score won’t cause it to lower. You can check your score now by clicking here, which will allow you to receive your score from all three credit bureaus (along with your associated credit reports). Checking your score before you go house shopping is important because it lets you know how likely you are to be approved for a mortgage, and also informs you if there are any errors on your credit report that need to be cleared up before you put an offer in on a house.

Different Industries Use Different Credit Criteria to Score You

In addition to receiving credit scores from credit bureaus, different industries and types of lenders will look at your creditworthiness in unique ways.

For example, if you apply for a credit card or auto loan, the lender is going to look not only at your credit score but also your repayment history of paying back existing or closed credit cards and auto loans. This is because your repayment history of certain debt types tells lenders how likely you are to repay them on time, too. For this reason, some lenders in these industries use uniquely-created credit scores that are different from the scores Equifax, Experian, and Transunion provide to a mortgage lender to use.

Mortgage lenders know, however, that not only is a mortgage likely the largest loan a person or couple will ever take out, but that there’s no way besides your credit score to estimate your likelihood of paying your mortgage payment when you’re a first-time homebuyer.

For this reason, mortgage lenders look for you to have a 43% debt-to-income ratio. This means the amount of debt you currently have will factor into how large of a mortgage you’ll be approved for. The more existing debt you already have, the lower the amount of mortgage you’ll be able to get.

Our Network of Lenders May Be Able to Give You Credit Recommendations

Even if you’re unsure if you’ll be approved for a mortgage based on yours or your partner’s credit score, if you’re in the market to buy a home you can still fill out our form for a free quote. Ifyour mortgage broker tells you they’re unable to approve you for a mortgage now, or that you don’t qualify for the amount of home loan that you want, they may be able to give you quick tips about what aspects of your credit history need to be improved in order to qualify for the mortgage you want.