Loan Modification

FHA to Impose Credit Score Minimum: No Big Deal

By Karen Lawson

With less than one percent of FHA borrowers having FICO credit scores of less than 580, the FHA decision to impose a minimum credit score of 500 isn’t likely to impact many borrowers. Most FHA borrowers have credit scores in excess of 620, so imposing a minimum of 500 isn’t going to impact access to mortgage loans by credit challenged borrowers. If you’re looking for a home loan, and cannot qualify for a conventional mortgage loan, FHA home loan programs offer the following benefits

• Low fixed or adjustable rate mortgage loans backed by the federal government
• Flexible credit requirements including lower credit scores and alternative credit documentation for borrowers without traditional credit
• Ongoing support through FHA foreclosure avoidance programs for homeowners experiencing financial hardship

Low credit scores can impact your ability to find an affordable loan, as mortgage rates are higher for those with credit problems.  Taking time to improve your credit can save money over the long term, as homeowners typically pay tens of thousands of dollars in interest over the term of a mortgage loan.

Preparing for Your FHA Mortgage Loan: DIY Credit Repair

The first thing consumers need to know about improving credit is that there are no instant fixes. No one can make your bad credit “disappear,” overnight, nor can they “fix it.” No one can improve your credit scores but you.  Before shopping for a home, you’ll want to look for a home loan. Here are a few things to do before requesting mortgage quotes:

• Order your credit reports and scores: Keep this information for future reference.
• Review your credit reports for errors: Reading credit reports is about as exciting as reading the tax code, but it can help with finding errors on your credit reports that could negatively influence your credit scores.  Your credit reports contain contact information and directions for disputing incorrect information.
• Take charge of your debts: Mortgage lenders approve loans based in part on how much debt you have. Paying down credit card debt can help you qualify for a mortgage loan more easily.
• Don’t use or close credit card accounts: The less credit card debt you have when applying for a home loan, the better your chances for getting approved at lower mortgage rates. Freeze your credit cards in a block of ice or stash them in a tank of piranhas, but don’t close your accounts. This reduces your total available credit, which raises your credit utilization ratio. The more available credit you use, the lower your credit scores. 
• Save, save and save: Having savings suggests financial responsibility. You’ll also need to save toward a down payment and closing costs for your new home. FHA guidelines require a minimum of 3.5% down; your closing costs and the up-front mortgage insurance premium (UFMIP) can cost a few thousand more. Arrange automatic deposits for your savings accounts; you’ll be less likely to miss the money.

Talking with a HUD approved housing counselor can help you plan for buying a home with an FHA loan.

Full post as published by FHA Mortgage Guide on July 19, 2010 (boomark / email).