Buying a new home and being able to finance that home with the FHA Home Loan Program is an exciting time, but finding out you don’t qualify for an FHA Home Loan because you have a low credit score is not exciting at all, in fact quite the opposite. Luckily for those who do have low credit scores, there are steps that can help you in rebuilding your credit and raise your credit score high enough so you can qualify. When it comes to credit scores the FHA Home Loan Program is much more lenient than other traditional loan programs, but there are still minimum standards the FHA will require a borrower to meet. Lenders use your credit score and history to determine how much of a risk you are to them as a borrower and whether or not you would default on the mortgage loan. If you have a higher credit score it’s much easier for lenders to approve you, and while the FHA doesn’t exactly have a credit requirement, most lenders require a borrower to have at least a 620 credit score.
Understanding Credit Scores
Your credit score and history is a direct reflection of your past credit worthiness and patterns. The last two years are the most important when lenders are looking at your credit history, basically, the older credit doesn’t matter as much. Lenders will typically look at the last two years of your credit score and at through the three main credit bureaus. Equifax, TransUnion, and Experian are the three major credit bureaus that are reported to. All three of these bureaus use something called the FICO score which produces your credit score. All three bureaus may have similar scores, but they will usually never have the same score. Lenders will then ignore your highest and lowest scores and focus on the middle score and will use that for evaluating your qualifications.
Here are 5 categories that will most likely drop your credit score;
- Your Payment History
- Your Current Account Balances
- The Length of Your Credit
- The Type of Credit You have
- Any Hard Inquiries Made Against Your Credit
Each one of the categories listed above will have its own impact on your grand total credit score. Your payment history and current account balances are the most important categories. These two categories alone make up two-thirds of your overall score. The length of your credit will allow lenders to know how long you’ve been using your credit and whether or not you have been using it responsibly. The type of credit is referring to all other loans, credit cards, student loans, mortgages, etc. and hard inquiries show everything that requested your score. Some inquiries are considered soft and don’t play a very big role in your score determination, other inquiries are considered hard, and too many hard inquiries can look bad on your credit history and bring down your score.
Rebuilding Your Credit
The first step in rebuilding your credit is to go through your credit history and address any mistakes or incorrect information immediately. You can file a dispute through any of the three major credit bureaus. If there is no incorrect information your next step is to look at your payment history and your account balances, usually any payment that has been late for longer than a 30-day period will be reported to the credit bureaus. Catch up on any and all of your late payments and continue to keep those accounts current for 6 to 8 months. Credit building can feel like a very long process, but in just 1 year you can make a significant amount of difference to your score. Starting with these steps will help rebuild your credit. If you feel like you have too much debt, try contacting a debt consolidator and talking with them about your options.