Home Buying with a So-So Credit Score
Don’t have a great credit score but you want to buy a house? There is still hope for those with blemished credit reports. According to one mortgage broker al potential home buyers should look for FHA loans.
The Leniency of FHA Mortgages
FHA mortgages have multiple advantages. The down payment can be as low as 3.5% of the price of the property and buyers do not have to have a perfect credit score. You can have a blemished report and 580 is the eligibility standard.
Another great benefit of this loan is that the funds for the down payment can be donated by a relative. Loan underwriters typically want to know where down payments came from, but FHA mortgages are pretty lenient, so if you receive funds from a relative, all that is needed is a letter documenting where the funds came from.
The Federal Housing Administration previously required a minimum score of 620, however, today they will accept scores as low as 580. Even with a low score, it’s important to have a healthy down payment and low debt. This will show the loan officer that you have the ability to pay back the loan.
Improving Your Credit
Paying your bills on time helps your credit a lot. Being late on your monthly accounts is one of the biggest factors to ruin your credit. But also keeping your balance to a certain limit authorized by lenders affects your credit score. To maintain a good credit score you should keep your balance less than 35% of the authorized limit and pay your balance on time each month. One of the most important ways of boosting your credit score is checking for inaccuracies, then disputing them with the credit bureaus. If they verify that anything on your report is incorrect, it will be updated or even deleted, which can increase your score.
Calculating Credit Score for Mortgages
Your credit rating, also called FICO SCORE, is calculated taking into account the following factors: credit history, debt ratio – available credit or percentage of debt you have incurred, your payment history, the number of credit applications or inquiries on your report, and types of debts you have. The five components that mortgage underwriters are looking for, which make up your score is broken down like this: Payment history: 35%, Amounts owed: 30%, Age of your credit history: 15%, Amount of types of credit in use: 10%, and Account inquiries: 10%.
This is how the underwrites will access your risk level for repaying a mortgage loan. They are looking to see how you have handled your past responsibilities, and this will help them to make their final decision. Of course, this is only a snapshot of what they consider. Loan underwriters will also look at the amount of your down payment, as well as how much savings you have in your bank account. All of this provides an overview of your reliability. While it’s important to review your credit report, and keep a good score, blemishes don’t always tell the complete story, so it’s important to meet with a mortgage broker and get a clear picture of how to get you into a home.