One of the finest satisfactions in life is to live in a comfortable place one can call home. Finding a place suitable to ones desire is a tedious process and after finally zeroing in something comes the question of finances. In all practicality, it is rare that one has savings enough to buy the place lump sum. And so arises the need for a loan with its concerns of down payment, interest rates and the like. The problem only increases if there is a bad credit score; because that is the first thing a bank/lender looks at when you apply for a loan.
The Federal Housing Administration or FHA has come to be known as the Bad Credit Home Loans. FHA, a government agency of US created as a part of the National Housing Act of 1934, insures loans made by banks and lenders for people looking to buy a home. It aims to improve housing standards and through insurance of loans, provide a home financing system. The FHA has made the impossibility of a person with bad credit to qualify for a loan into an easy task.
When applying for a loan, one of the primary items on the checklist would be the credit score of the borrower. The credit score represents the creditworthiness of the person. In other words, credit score determines the potential risk to the lender in case the borrower defaults in payment. A bad credit implies that the borrower is not regular with payments and the lender will have difficulty in recovery of the loan. Hence with a bad credit, the chance that a loan will be sanctioned on reasonable terms is unlikely. With bad credit, the loan may be granted at exorbitant interest rates and/or a high down payment.
Bad Credit is Okay
The credit score of a person is a numerical value based on the person’s credit history and is used to predict future delinquency. When a customer files for credit from a bank, institution or company, that information is forwarded to a credit bureau which matches the information of the applicant with information in its files. From these records, the credit score is calculated based on the person’s history. This credit score is then forwarded to the lender.
Different credit bureaus have different methods of calculating the credit score. The FHA follows the FICO standards.
There are several factors which affect the credit score, for example:
- Payment history
- Amount owed
- Length of credit history
- New credit, etc.
For conventional loans, the credit score requirements vary from lender to lender. This variation can be from a minimum of 650 to more than 700.
But since the FHA has entered the fray, things have changed. The self-funded government agency has made it possible for a person with bad credit to get a loan.
While FHA encourages prospective home buyers to have the best possible credit history, FHA backed loans just require a minimum FICO score of just 580 to avail the low down payment advantage of 3.5%.
In case, if a person has an even lower credit score doesn’t mean he cannot have the assurance of a FHA loan. Only he cannot avail the lower down payment and has to put down a 10% down payment.
Options Available to Bad Credit Borrowers
So, if you have a bad credit history, you have to make the choice of either getting a loan with a bad credit and higher down payment or you can wait and improve on your credit score to avail the lower down payment option. It means that even with the advantage of lower credit requirements by FHA, it is always advantageous have a better credit score.
If the higher down payment is not an issue, then with bad credit score of lower than 580 can get you loan with FHA home loans. But it is a good idea to use the saved money to improve your credit score and then avail the loan at a lower down payment.
The best way to improve credit score is to make payments in time and keep credit balances at 30% or below your total available credit.
FHA home loans allow for lower credit requirements; have reduced the down payment amounts to minimum, slashed interest rates, reduced the closing costs and made it easy to refinance existing debts. With all these advantages, home owing has become an affordable dream.