New home owners will often look into getting FHA loans for help with purchasing their first home. FHA loans are a type of mortgage loan given by the Federal Housing Administration to help those who many not qualify for other loans. Those who have never applied for a loan before or perhaps were denied a previous application should review FHA loan requirements carefully to ensure they are eligible.
The Federal Housing Administration program was developed for two main purposes:
- To improve the housing market by providing a more affordable loan to those with lower credit scores
- To provide mortgage lenders with proper insurance
FHA loans are more affordable and offer a lower down payment compared to others. Down payments as low as 3.5% are possible but your credit score will dictate just how low the down will be, as well as the interest rate.
Benefits of going with an FHA loan versus others include:
- Accepts applicants with low credit scores and lack of a solid credit history
- Lower interest rates
- Lower overall cost on other fees and insurance
- Past bankruptcy or foreclosure won’t be an automatic denial
Credit Requirements for FHA Loans
Credit scores greatly affect eligibility for any loan, and while an FHA loan is ideal for those with poor credit, there are still some specifications when it comes to who can be approved. The better credit score you have, the greater the chance of your application being accepted under favorable conditions.
The Federal Housing Administration requires a FICO score of at least 580 for their low 3.5% down payment. If your score is under 580 you can still apply but will only be eligible for a 10% down payment.
If you have a score under 580 you should weigh the pros and cons before beginning the process of getting an FHA loan. Either you can settle for the larger down payment or instead wait and improve your credit score first. If you plan on buying a home within the next year or two and know you will need a loan, working towards a higher credit score right away is highly recommended.
Improving Your Credit Score for Approval
The very first thing to do is get credit reports for review. Knowing exactly where your score is at is obviously going to be useful but another benefit is that you can review your reports to see if there are any errors. Experian, Equifax and TransUnion are the largest credit bureaus in the US so getting a report from each is wise.
If you find errors on your credit report you will need to take proper action to rectify them. This often means contacting the credit bureau to dispute it. If you find no errors, you can begin the process of improving your score.
Whether you are starting with no credit or bad credit, here are some ways to get started:
- Stop Applying for Additional Credit Lines
When your goal is to improve your credit score it is best to stop applying for any new lines, instead focusing on your current ones. Some people believe having a good mix of credit cards is necessary for a good score but this isn’t true. If you are building credit from nothing you will need two or three cards but otherwise don’t apply for anything else.