In the past, the Federal Housing Administration (FHA) did not require a FICO credit score to provide home mortgage insurance. As of 2008, that changed as a result of a series of revisions to FHA approval standards. According to the FHA, having a minimum FICO score for FHA loan guarantees will help home buyers who are credit-worthy, but would not have qualified under the old standards. This article explains what the FHA does and how the new minimum FICO score for FHA loans fits into their overall requirements.
Identification
The FHA is an agency of the Department of Housing and Urban Development (HUD), which provides home mortgage insurance to low- and middle-income borrowers with limited cash for down payments or have had problems with credit. As of 2008, the FHA adopted the use of the FICO score as part of the first update of their lending criteria in 30 years. This change was prompted by internal studies that surprised everyone by showing lower income borrowers had higher FICO scores on average than those with more income. The adoption of the FICO score is intended to offer these people more access to mortgage insurance since they have demonstrated responsible handling of credit.
History
The FHA got its start during the Depression. From 1934 to the 2000s, the agency has insured more than 35 million mortgages for single family homes. In the 1960s, it shifted to primarily insuring mortgages for homebuyers with limited income and resources and as of 2008, insured 4.8 million home mortgages. It is the only federal agency that is entirely self-supporting, and funds its entire budget from the insurance premiums paid by the homeowners it insures.
Features
Under its new criteria, the FHA will normally require a minimum FICO score of 580. This is in contrast to lenders such as Fannie Mae and Freddie Mac, which look for at least 620, but charge a higher interest rate if the FICO score is under 640. The FHA does have other requirements. It prefers that there be no foreclosure within the previous three years. It does place a strong emphasis on having demonstrated that any past credit problems are resolved. For example, the agency will consider someone who had to declare bankruptcy, provided the reasons were valid and the applicant has shown a good faith effort to reestablish credit (usually, but not always, this means two to four years of rebuilding credit). Late payments (more than 30 days) on rent or mortgage payments are not acceptable. Also, a person must have no more than one to two payments on revolving credit (like credit cards) and none more than 60 days past due within the past two years.
Function
The above standards should not discourage anyone. In order to get that 580 minimum credit score, you'll pretty much have to meet all the other requirements anyway. Here are the specific steps you can take to raise your credit score. First, pay bills on time. If you run into a jam, contact your lender and make arrangements. If you do and follow through, most won't report a late payment or two. Reduce your total debt, especially credit card and other unsecured debt and ask lenders to reduce your credit card limits. Those two things alone account for 65 percent to 75 percent of the FICO score. Don't apply for or close credit accounts more than two to three times a year (less if possible) and definitely don't apply unless you are certain you'll be approved.
Considerations
There are a few other "credit killers" to avoid: tax liens, any bill going to a collection agency or court, and defaulting on any debt, especially a student loan (that will never come off your credit history). Start planning for the long term. Even if you have really bad credit, you can build up to that 580 level in two to four years if you work at it. Finally, keep in mind that the FHA does require that you have a down payment (usually at least 3 percent of the purchase price of the home) so start saving regularly. For more information, you can call the FHA toll free at 1-800-225-5342.
0 comments:
Post a Comment