Are you in the process of buying a house?
Well then, finance is the first option you will look for. There are different types of home loans available in the market. A buyer's credit score is the main factor in determining whether you can qualify for a particular loan. People who have a low credit score may find it more challenging to borrow money from financial institutions and mortgage lenders instead of those who have a high credit score. But, FHA mortgage loans are the most flexible loans that are available.
Yes, you can say that an FHA home loans is one of the most accessible loans to qualify for. But the question here is, “Can your credit score affect FHA loan while buying the home?” If Yes, then how? So let's find out!
What Is An FHA Loan?
FHA stands for Federal Housing Administration. It is a government organization that insures loans made to buyers with lower credit scores or making down payments of less than 20%. Texas FHA loans are ideal for first-time homebuyers as they offer flexible interest rates and down payment options. In addition, if you have an FHA loan, the mortgage lenders will be offering you some added benefits.
Information About Credit Score:
Before buying your dream house, knowing more about your credit score is necessary. Your credit score is a number that displays your reliability to pay back the loan on time. A good credit score will help you save money on interest and also qualify for more loans in the future. Conversely, if your credit score is low, there's more chance of losing out on getting an FHA loan with lower interest rates and more flexible terms.
Credit Score Vs. Down Payment:
Many people think that if they have a lower credit score, they are not eligible for FHA loans. This is not true. Although your loan will be approved based on your income and credit score, it has been seen that those who have a lower credit score and higher down payment are more likely to get their Texas FHA loan approved.
Credit Score Requirements for an FHA loan:
A credit score is one of the main factors that determine if you can get approved for a loan or not. However, there is no minimum credit score requirement for FHA loans. Typically, most lenders in Texas will approve an FHA loan application with a median FICO score of as low as 500. But the loan will be agreed with certain drawbacks.
- You will need a down payment of about 10% of the purchase price.
- The loan terms will not be favorable, and you will be charged a higher interest rate.
- Lenders will also consider your debt-to-income ratio with a low credit score before approving your loan. A higher DTI of about 57% will not be approved for an FHA loan.
On the other hand, if you have a median FICO score of 580 or higher, your loan will be approved with added benefits.
- More lenders will be ready to offer you an FHA loan.
- You will have to make a down payment of only 3.5% of the purchase price.
- The loan will be approved with favorable terms, and a higher DTI ratio will not affect your loan approval.
Why Is A Lower Credit Score Considered High Risk?
With a low credit score, your chances of not paying back the loan on time become higher than those with a high credit score. So, before approving any loan, lenders will first look into the risk involved and then only give the loan. Mortgage lenders consider low credit score as a high risk.
Factors that determine your credit score:
A credit score is influenced by several factors such as:
- Your debt and how much you owe: The credit utilization ratio also influences your credit score. The credit utilization ratio is calculated by dividing your total debt by the available credit. So, if you owe $10,000 on a $100,000 credit limit, then the ratio is 10%. The lower this number, the better it is for your FICO score. Also, a high debt-to-income ratio will lead to a low credit score.
- Your payment history: If you're carrying significant balances from month to month and not paying them off before the due date, this will lead to a lower credit score. Any missed payments and late payments will harm your credit score.
- The length of your credit history: Your credit history has about 15-20% influence on your FICO score. The longer your credit is used, the more it will be considered by lenders, and if you have shorter credit coverage, it can affect your low FICO score. If you haven't opened any credit card or used it, you don't have a long enough credit history.
- Your new credit applications: How many times you've applied for a loan in the past six months also affects your FICO score. If you apply too much for loans in that short amount of time, then most likely, the lenders will consider you as high-risk.
- The number of inquiries to your credit report: Too many inquiries into your credit report may negatively influence your score, even if they are related to loans for your new home.
- What's your credit mix? If you have different types of credits, such as auto loans, credit cards, and mortgages, you will be able to improve the FICO score since it has a 15% influence on the score.
The above factors will also affect the amount of mortgage that lenders in Texas will approve.
What Can You Do to Improve Your Credit Score?
If your credit score is not up to the mark and affects your loan application for FHA, what can you do?
You can take the following steps to improve your credit score:
- Replace any old accounts that have been inactive for a long time. If there are no accounts in your name, you can open a new account and use it occasionally until it gets reported on your credit report.
- Reduce the balance of your current debts to pay them off monthly. Make sure not to revolve more debt on your cards; instead, make the payment in full every month.
- Make regular online payments. If you have late fees for credit card bills, avoid applying for new credit card accounts. If you've missed the due date for one month, then try to repay it immediately or before the next due date.
- Don't close any credit account since this will affect your credit score. Instead, keep the card if you don't use it and pay your bill in full at least once a month.
As seen above, your loan can be approved with a low credit score, but there are a few reasons where a lender will not approve your FHA home loan with a low credit score.
- You have been declared bankruptcy in recent years.
- If you have a high debt-to-income ratio.
- You have an overall insufficient income.
Bottom line:
If you want to buy a home, but your credit score is not up to the mark, don't worry! There are still chances of getting approval from the mortgage lenders even with this problem.
