If you’re planning to buy a house, it’s possible that you can qualify for an FHA loan that will put you on the path to home ownership sooner than you think. The current low interest rates are a homebuyer’s dream – and with the housing market far from a full recovery, prices are attractive as well. However, before you call up your local FHA lender, you need to understand how FHA loans work, and what kind of credit you need to qualify for one.
The Right Credit Score to Qualify for an FHA Loan
FHA is not an actual lender. They are a federal agency that issues loans from lenders that have been FHA approved. What this means is that banks are free to set their own requirements for underwriting an FHA loan (and they almost always do so). If you are interested in applying for an FHA loan, you are now required to have a minimum FICO score of 580 and a minimum down payment of 3.5%.
If your credit score is than 580, you aren’t excluded from FHA loan eligibility, however, you will have to come up with a down payment of 10%. It’s important to that banks are free to set their own requirements for underwriting an FHA loan (and they almost always do so).
A more realistic score for FHA approval falls between 640-660 as the minimum, and you’ll want your scores to be even higher if you want the best rates. In short, the bar has been raised as to what is an acceptable credit score and people who would have qualified for an FHA loan only a few years ago can no longer do so.
Getting Your Credit Score High Enough to Qualify for an FHA Loan
Unless you are just coming out of a bankruptcy or have another major (and accurately reported) negative item on your credit file, there are probably some things you can do to clean up your credit report and improve your scores.
Your first step will be to pull your credit report and take a look at what’s actually listed. If there are inaccurate entries, you’ll want to clean them up before you go in to apply for a loan. Here are just a few of the things that could cause your application to be denied:
- Charge-off accounts
- Collection accounts
- Being listed at over 90 days past due
- Tax Liens
- High Debt-to-Income ratio
- High Debt-to-Available-Credit ratio
Your best bet to bring your credit scores up quickly will be to address as many of these issues as you can. Keep in mind that for some lenders, you cannot qualify if you have any charge-off or collection accounts listed that haven’t been paid off.
If that is the case for your particular lender, you have some options –
- If the debt is past the credit reporting limit, you can dispute the listing and have it removed.
- If the debt is inaccurate or does not belong to you, you can also dispute the listing and have it removed.
- Some creditors will accept a partial payment in order to report the listing as paid and closed (or to delete the listing altogether), but this is only available on a case-by-case basis.
If you have a lot of charge-offs and collection accounts, you may need to hire a credit repair specialist in order to get your scores to where they need to be so that you can qualify for your FHA loan.
Other Considerations when Applying for FHA Loans
Because FHA loans are written by different banks, you are not locked into just one option. Whereas one lender may not be able to qualify you, another might. The most important thing to do is plan your applications and make sure they are spaced close together.
This is because having multiple lenders pull your credit will only damage your credit scores if you spread out your home buying efforts over several months. Credit reporting agencies understand that certain patterns of behavior indicate that you are shopping for a home and are less likely to lower your scores if you maintain the expected shopping pattern.
If your credit scores are not where you know they should be, don’t try to rush through the application process. Give yourself some time to get your credit repaired and get the best interest rates and the best price for your home.
If you need help, don’t be afraid to reach out to a credit repair specialist – they help people get their credit scores higher in order to qualify for an FHA loan all the time, and they will be able to advise you as to what your options are for cleaning up your credit and what time-frame you can realistically expect for improvement.