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Q: I am looking to buy a home this year, but I don’t have a lot of money to put down. I know a few family members have been assisted with FHA loans, and I was wondering if I qualified. My credit score is about 620.
A: First, some background information about FHA loans. FHA loans are mortgage loans that are insured by the government. They are offered to help people who would not otherwise qualify for a mortgage because they do not have excellent credit or have not been able to save up enough money. They allow prospective homeowners to purchase a home with little money down.
FHA loans are not made by the government; they are made by lenders (such as banks) and insured by the FHA (Federal Housing Administration). As a result, the requirements differ from one lender to the next, as do the interest rates. That’s why it is important to shop around for the best rate. Despite these differences, however, most lenders will not approve someone with a credit score lower than 620.
A few years ago, it was easier to find a bank willing to loan to you with a credit score under 620, but with the recent housing market crash and all the bad publicity about subprime lending, it has become nearly impossible to find lenders who are willing to. Even if you were able to find a lender who would give you a mortgage with a credit score below that, your interest rate would be significantly higher and you would end up paying thousands more over the course of the loan.
If you find that you are turned down for an FHA loan, don’t worry. Continue to pay rent and work on raising your credit score. Make your rent payments and other bills on time. Pay down your credit cards to no more than 25% of the credit limit. Consider applying for a mortgage that takes up a smaller portion of your income. This will appear less risky to prospective lenders. After a year or two, check your credit score. If it is higher, reapply.[include file=/wp-content/themes/customtheme/rec-creditscore.php]