Tips to Improve Your Credit Score for an FHA Loan
The idea of purchasing a new home can be exciting, but researching what mortgage loan options are available to you can be daunting if you don't know where to start. As you visit various banks and financial institutions, you will likely hear about an FHA loan, which differs slightly from a conventional mortgage loan.
An FHA loan is a loan insured by the Federal Housing Administration. This type of loan is often an attractive choice to many prospective home buyers because the interest rates of an FHA loan are typically lower than those of a conventional loan. Additionally, a large down payment may not be required.
However, when you get an FHA loan, you will be required to pay mortgage insurance each month in addition to your mortgage payment, plus an initial upfront mortgage insurance payment. This amount can vary based on the amount of the loan. The insurance protects the lender should you default on the loan.
FHA Loan Information and Requirements
While FHA loan requirements can be more flexible than those of a conventional loan due in part to the mortgage insurance, a low credit score can still decrease your chances of being approved. Before seeking an FHA loan, take steps to raise your credit score so that you won't be disappointed. A minimum credit score of 580 is needed to secure an FHA loan with only a 3.5 percent down payment amount.
How to Raise Your Credit Score
Here are three steps you can take to raise your credit score:
1. Review Your Credit Reports
Sometimes credit reports contain information that is inaccurate or hasn't been updated to reflect recent changes, such as paying off late bills or a collections agent. Check your credit report for any mistakes, and if you find any, contact the reporting agencies so that the report can be updated. Even a few small errors being fixed can result in a significant change in your score.
2. Eliminate Bad Habits: Pay Your Bills on Time
Credit card companies aren't the only institutions that report your financial activity to the credit reporting agencies. Utility companies such as the electric company, the cable company, and even your phone carrier can report late or missed payments to credit agencies as well. Continually reported late payments can reduce your credit score, so make sure you are paying all your bills on time. Additionally, try not to spend too much on your credit cards, as high balances can also cause an issue.
3. Reduce Your Credit Card Balances
Your credit card balances count as debt. High balances can negatively impact your credit score, so reducing them can work in your favor. Additionally, when you apply for a mortgage, the lender will look at your debt to income ratio. This is derived by figuring out how much you make each month versus how much debt you have to pay each month. As ample credit card balances can equate to a high amount of debt, subsequently giving you a high debt to income ratio, the lender may require you to pay off some of the debt in advance before being able to approve you for the loan. In conclusion, it is always wise to maintain a good credit score, as it can help you in many aspects of your life, especially when applying for a loan.