What do first-time home buyers need to understand about the credit check process for getting an FHA mortgage?
There are many variables but one thing you can do to get a better understanding of what it takes to be approved for a loan is to start trying to think like a loan officer–their job depends on making sure that you are a good credit risk.
How can you help the lender help you?
What you don’t know can hurt you in the journey toward buying that first piece of real estate. Before you begin working with a realtor, you should know several things about the credit check process.
Credit is a major part of home loan approval and you want to be able to convince your lender you are ready for a loan with your FICO scores, repayment history, and credit utilization.
FHA Home Loan Credit Check Rules
Your lender is required to pull your credit reports in order to approve or deny the mortgage. Your lender will review the following:
- Payment history
- Credit limits and how close the borrower is to those limits
- Overall patterns of credit use
- Date of the last late or missed payments where applicable
- FICO scores
What Else The Lender Is Looking For
Credit scores are not the only thing the lender is interested in; your lender is required to review the following when approving the home loan-note that this list includes information to help the lender determine if the borrower can afford the monthly payments on the mortgage:
- Debt and liabilities
- Amount of the adjusted value of the home
- Borrower’s Effective Income
- Borrower’s Assets/Reserves
- Adjusted Value
- Borrower’s total Mortgage Payment including Principal, Interest, Taxes, and Insurance (PITI)
The amount of income, compared to the borrower’s debts and projected mortgage loan payment are important parts of this review-the lender won’t just look at your hypothetical ability to pay your mortgage, she will run the numbers to see how close you actually get to being able to afford the loan.
First-Time Home Buyers: Work On Your Credit Early
Working on your credit does not have to mean paying a third party to “raise your credit score”. It means paying all debts on time every time for at least one year or more.
It also means lowering your credit card balances to get them far from the maximum credit limit. You basically need to get your debt-to-income ratio as low as you can before you apply for the mortgage for best results.
It helps to think like a loan officer when you are reviewing your credit, debts, and liabilities. Would you approve a home loan for yourself if you were a lender? That can be a very helpful question to ask during the planning stages of your home loan.
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we’ll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner’s Insurance
Step 9: What to Expect at Closing