The Federal Housing Administration, or FHA, is one of the most important housing organizations in the country. This office, which is a section of the Department of Housing and Urban Development, doesn’t actually loan money, but instead provides insurance and support for loans, giving lenders less risk if they write a loan that fits the administration’s guidelines.
Lenders, however, need to make sure that the loans they write meet the specific guidelines set by the FHA. They can still write loans outside of these parameters, but they will loose the financial insurance provided by the FHA; insurance that could be needed if the loan goes to default.
The FHA’s requirements cover a wide range of factors, including down payments, details of the home, and credit scores.
But what if you have a low credit score? Does that mean it’s impossible to secure a loan backed by the FHA? For that matter, why is it so important to have an FHA loan anyhow?
As we’ll see, an FHA-supported loan has many advantages, and they can be acquired even if you have a low score.
Low-Credit FHA Loans
Why Choose an FHA Loan?
The FHA supports lending to many different homeowners across the country, but there are other options and you, as a borrower, aren’t confined to only FHA loans. However, using an FHA loan does have certain advantages.
First of all, it’s generally easier to qualify. Most lenders will exclude applicants who have a rocky credit history, but the FHA makes these loans available even for people with poor credit. In general, they also have excellent interest rates. If your loan is supported by the FHA, you’ll likely discover that it comes with lower interest rates than what you might find on the open market.
Lower fees are another advantage of an FHA loan. You’ll likely enjoy a more affordable loan-closing process, which is always welcome when you are spending a large amount on the house alone.
These loans may also be available even if you have a recent bankruptcy or foreclosure. As long as you meet the other requirements set by the FHA, you should be able to qualify.
It’s also possible to qualify for an FHA-backed loan even if you have no credit history whatsoever. While the FHA generally requires two lines of credit for qualifying applicants, if you don’t have a credit history, you can still work to get qualified.
Credit Requirements for an FHA Loan
The FHA has specific guidelines for their loan support, including credit scores. If you are applying for an FHA loan, you’ll have to have a FICO score of 580 or higher in order to qualify for the low-down-payment program. If your score is 580 or better, you can secure a loan backed by the FHA with only 3.5% down. This opens up a lot of available property and helps you keep more money in savings if you wish.
If your score is less than 580, you will have higher requirements that include a larger down payment. In this case, you will have to bring a down payment of 10% or greater to qualify for a loan supported by the FHA. If you are hoping to buy a house but don’t have ideal credit, you’ll likely need a larger amount of savings to qualify for a loan. In some cases, it may be better to repair your credit instead of trying to save the 10%, which can represent tens of thousands of dollars.
A low credit score, however, not the end of the road. For example, if you have a bankruptcy or foreclosure in your past, you will usually qualify for a loan two years after the event occurred. If, however, you have federal tax liens, you will not be eligible for an FHA loan until it is completely paid off.
How to Get Approved for a Low-Credit FHA Loan
Large Down Payment
One of the best ways to deal with a low credit score is to have a large down payment. Obviously this is not easy and it can be difficult to save money, but if you can bring a large down payment, you will significantly increase your chances of getting approved for an FHA loan.
For example, if you have a low credit score and want to purchase a $200,000 home, you can make it happen by bringing a down payment of $40,000. (20% of the purchase price.)
Look for More Affordable Property
Although we all want to live in the most elegant and impressive home possible, it may be prudent to shop for a smaller, more moderate home if you have a lower credit score. Less-costly housing has a few advantages for low-credit buyers. First, it will lower the total you are borrowing, which means lenders are taking less risk by working with you.
Second, it increases the percentage of your down payment, no matter how large that payment is. For example, if you have $40,000 that you can use for a down payment, this would only be 10% of a home worth $400,000. However, if you search for a home worth $200,000, that same down payment is now 20% of the purchase price.
Patch Your Credit
There is also the option of working to increase your credit. While there are hundreds (probably thousands) of books about how to improve your credit, you can start by inspecting your credit for false or outdated negative marks on your report. Cleaning your report is an effective first step that brings results faster than virtually all other measures.
The other steps you can take are long-term steps that will slowly improve your rating. This can include paying bills on time and lowing your debt load.
Bad Credit? Get Reliable Advice on Low-Credit FHA Loans
As San Diego Purchase Loans, we take a common-sense approach to underwriting. We’ll look beyond your low credit scores to help you get qualified for an affordable loan.
While we can’t guarantee approval, we promise to use all of our knowledge and resources to help you get approved!
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