How to Get the Credit Score Needed for FHA Loans

Home Buying

How to Get the Credit Score Needed for FHA Loans

May 25, 2019 | by Reuven Shechter

At A Glance

FHA loans have more lenient credit score and down payment requirements than conventional loans. There are a few things home buyers can do to improve their credit score to prepare for applying for an FHA loan.

How to Get the Credit Score Needed for FHA Loans

The Federal Housing Administration’s (FHA) mortgage program was created to help people with moderate incomes buy a home. The loans are insured by the FHA and offered by several different lenders.

Like with any other loan, the FHA has laid down several different requirements for those looking to make use of its loan program. The credit score and down payment requirements to qualify for an FHA program are more lenient than conventional loans.

Qualifying for an FHA Loan

What makes FHA loans attractive to many borrowers are the low minimum credit score requirements. You can get an FHA loan with a FICO score as low as 580.

It’s important to remember that it’s not the FHA itself that’s lending you the money; they insure the mortgage. Check with individual mortgage lenders to find out what their credit score requirements are for FHA loans. In most cases, you will receive an FHA loan with a credit score around the 640 mark without issue.

Along with meeting credit score requirements, you also need to save enough money for a down payment. The minimum amount you can put down for an FHA loan is 3.5%. Don’t forget to add closing costs when calculating how much money you’ll need up front.

Another expense that comes into the picture with an FHA loan is private mortgage insurance (PMI), which is mandatory. Part of the payment for PMI needs to be made upfront, and the rest is paid in monthly installments.

How to Meet FHA Credit Score Requirements

Make Sure Your Credit Score is Accurate

Credit score errors are way more common than you might first think. Over 25% of consumers identify errors in their credit reports.

There are many ways in which mistakes can show up in your credit report. Some of these could be your own fault because of faulty information or even bad handwriting in your loan applications. In other cases, errors can arise because of mistakes made by financial institutions.

Given how common these errors can be, it’s key you make sure your credit score is accurate each time you make a check. Report any inconsistencies to a credit bureau along with documents containing the accurate information.

Keep Your Credit Card Balance Low

Almost a third of the credit score calculation is based on your credit utilization. That’s the ratio between your total available credit and the amount of credit you are using at any given time.

Since credit utilization is such a key metric, it’s important that you pay down the balance on your credit cards as much as possible before applying for a loan. Maintaining your balance close to 1% of your maximum credit is ideal since that shows you’re using your card and paying your off your credit debts on time.

Pay Your Bills on Time

Paying your credit bills late can have a negative effect on your credit score. Creditors usually record a late payment 30 days after a bill, so making a payment within that window can prevent a hit on your credit report.

The amount it takes your credit score to improve from doing this depends on your existing track record paying your credit bills. It will have a greater impact if you’ve been making a few late payments. If you manage to pay off your bills on time, you can see an improvement to your credit score within two months.

Opening a New Type of Credit Account

Part of your FICO score depends on your credit mix, which is a term used to describe diversity in a consumer’s credit profile. Mortgages, student loans, credit cards, and store cards all contribute to your credit mix.

If your credit mix is lacking, you can improve it by applying for a new type of credit account. Along with improving your credit mix, this could also enhance your credit utilization since it increases your outstanding credit line.

When you apply for a new credit account, remember that it will require a hard credit check. Opening many new accounts inside a small window can affect your credit score negatively, so be careful how you go about improving your credit mix.

Alternatives to FHA Loans

FHA loans are aimed at those who may not meet the credit score requirements or have the down payment required for a conventional loan. This makes it a convenient mortgage option, but that doesn’t make it the best option for everyone.

When you put down a small down payment like the FHA’s minimum of 3.5%, it takes longer for you to build equity in your home. It can also mean having to pay higher installments each month at a higher rate.

Buyers in a secure financial position should save some money and use a conventional home loan. You can use the aforementioned methods to improve your credit score, which can lead to higher loans and better rates.

If you’re unsure about which the right mortgage product for you is, consult a local real estate agent. Agents will take the time to understand your situation and recommend lenders who provide loans that fit your needs.

You can find a top-rated real estate agent in your city by filling out the form on our website. Clever Partner Agents help home buyers find homes within their budget and choose a mortgage lender based on their financial situation.

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