There are four things to remember about home loans and credit scores, especially for first-time home buyers looking to buy their first piece of real estate.
FHA home loan rules are more forgiving when it comes to credit scores, but there are still minimum standards and requirements to meet. Keep these four things in mind when planning your home loan application for best results.
Credit Utilization And Payment History Are Both Very Important
How much of your credit limit do you use? This is a question the lender needs to answer because how you use credit is just as important as all the other factors that go into home loan approval.
Carrying high credit card balances can hurt your chances for home loan approval-try to keep your balances below the halfway mark (halfway to your credit limit) or better. 30% is ideal.
Your payment history is also a key factor in home loan approval. Plan on making on-time payments on all financial obligations for at least 12 months before you apply.
Applying For Too Much Credit Hurts Your Home Loan Approval Chances
Always remember that a credit card application results in a hard inquiry on your credit, which lowers your FICO score. And your potential debt could be a factor in the lender’s decision.
Your existing debt may or may not be high but if you have the potential for more debt, does that affect the lender’s view of you as a good credit risk? How much more potential debt could be a factor.
Lenders May Check Your Credit More Than Once During The Home Loan Application Process
Until you have closed the deal, having paid your closing costs, and taken possession of the home, your credit is subject to further review by the lender.
Don’t make the mistake of assuming that once the loan is approved that you can apply for new credit or skip a payment on a financial obligation.
Your lender is required to insure that your financial position does not change significantly before the loan closes. Some borrowers have learned the hard way that multiple credit inquiries by the lender can and do happen.
Settling A Disputed Account For Less Than The Full Amount Owed Can Hurt Your Credit Score
Some borrowers try to settle old disputed accounts (or more recent problems) in the home loan planning stages. But some kinds of settlements may hurt your credit score. But as the credit reporting agency Experian advises on its’ official site, settling for less than the full amount is still better than not paying it at all, resorting to a bankruptcy filing, etc.
Your credit may take a hit for settling a disputed account for less than the full amount owed, but it will take a bigger hit if you do nothing.
If you are concerned about your ability to qualify for an FHA home loan, talk to a HUD-approved housing counselor and get some pre-purchase home loan planning advice. Call the FHA at their toll-free number 1-800-CALL FHA to request a referral to a housing counselor near you.