Many people who have rented for far too long dream of finally becoming homeowners. For most, finding the home of their dreams and no longer being forced to spend thousands of dollars in renting apartments is a life worth living. However, before you are ready to apply for your first home loan, there are important considerations you must address. Financial factors such as your credit score and debt to income ratio are items that banks will investigate before approving a loan. Before you begin the home loan application process, it is important to know your credit score and how it will impact your FHA Loan Application.
What Is an FHA Loan?
For starters, let’s look into what an FHA Loan is and how it impacts the home buying process for first-time homeowners. An FHA Loan is a loan designed for those with less than optimal credit scores and makes owning a home more obtainable. It is is a home loan that is provided by the Federal Housing Administration (FHA) under a first-time home buyer program and is usually guaranteed. The loan is given through private lenders like banks and credit unions and is backed by the FHA. If you are unable to repay your loans then the FHA will pay the lenders back on your behalf.
Features of FHA Loans
- A down payment of 3.5% is required when obtaining your FHA Loan as a first-time homeowner
- You are approved to borrow money for buying a home with average credit or even with problems in your credit history
- You are approved to purchase condos, single family homes, multi-unit properties, as well as manufactured homes with an FHA loan backing
- The FHA’s 203k program is available to provide extra funding & funded home renovations
- You may obtain gifted money to help fund your down payment
How Does Credit Score Affect An FHA Loan Application?
Since FHA Loans are established to help those who would normally face difficulty in becoming a homeowner, having a low credit score may benefit you more than you know. Borrowers with a lower credit score are more likely to get approved for an FHA loan.
In order to make a down payment as low as 3.5%, your credit score can be as low as 580. If you want to make a bigger down payment, your credit score can be lower. Having a credit score that’s between 500-580 can allow you to put at least a 10% down payment on your loan and mortgage.
FHA Loans vs. Private Lenders
Private lenders that provide housing loans will determine how much you can borrow and may be more restrictive than FHA loan requirements. If you have a low credit score or no credit history at all, it’s advised to find a lender that performs manual underwriting. Manual underwriting is a process that allows lenders to evaluate your credit history by looking into credit information such as your rent payment history or any utility payments that you’ve made in the past.
Credit History & FHA Loans
A key factor to remember when applying for an FHA loan is that your credit history is more important than your credit score. It’s advised to not take out any new loans when getting ready to apply for an FHA Loan and to begin paying down any loans you may already have. Debt such as credit card bills should be paid immediately to keep your debt to income ratio down and increase your credit score while going through the loan process.
Is an FHA Loan Right for You?
While there are many ways to obtain a loan for home ownership, if your credit score or credit history is not up to par then you may benefit from applying for an FHA Loan. Mortgage brokerages like Fairfax Mortgage Investments have FHA loan experts to help get you started by reviewing your qualifications as a first-time home buyer. With years of experience and many satisfied clients who have obtained the FHA Loan to become homeowners, Fairfax Mortgage has the knowledge and expertise to help you qualify for your first time home buyer loan.
Need assistance applying for FHA loans or have questions about whether or not you qualify? Contact Fairfax Mortgage today online or over the phone at (703)214-7255, and we’ll help you and your family’s home-buying needs.