Qualifying For FHA Home Loans With Low Credit Score?

This BLOG On Qualifying For FHA Home Loans With Low Credit Score Was UPDATED On June 22, 2017

Having Low Credit Score is expensive. Consumers with Low Credit Scores will not just be affected with higher interest rates on FHA Loans, but will pay higher rates on all types of credit. Here are some examples on higher costs consumers with low credit score than someone with a higher score:

  • Higher mortgage interest rates
  • Higher interest rates on credit cards
  • Higher interest rates on auto loans
  • Higher interest rates on just about everything

Effects Of Low Credit Score

Home buyers can qualify for FHA Loans with low credit score.

  • FHA requires a 580 FICO for a 3.5% down payment FHA Home Purchase Loan
  • Borrowers with credit scores between 500 FICO and 579 FICO can qualify for FHA Loans with 10% down payment
  • Just keep a note that borrowers with under 640 FICO will be paying a higher mortgage interest rate than borrowers with higher scores

Mortgage Process With Low Credit Score

We all know that a creditor or lender will run a credit check when a mortgage loan applicant applies for a home loan.  Home Buyers can qualify for FHA Loans With Low Scores, but they need to be aware that they will be paying a higher mortgage interest rate.

Here is the basics of the mortgage process:

  • The lender reviews the borrower’s credit score, credit payment history, income, derogatory credit and makes a decision of whether or not to grant credit. 
  • Credit checks are not just done by mortgage lenders but by creditors and insurance companies.
  • Credit checks are pulled when someone applies for insurance as well. 
  • When an insurance company does a credit check on an insurance applicant, they get an insurance credit score. 
  • The insurance score is what determines the risk of the insurance policy holder and that insurance credit score is what dictates the premium the insurance applicant will be charged. 
  • A low credit score means a higher insurance premium.

Low Credit Scores And Employment

A large percentage of employers now run credit checks as part of their application process.

  • It was not uncommon before for employers to run criminal background checks but now many employers run credit checks and a low credit score can affect a job applicant’s chances of employment and/or promotion. 
  • A good friend of mine had always wanted to work for this company which we will call it One Solution Real Estate. 
  • One Solution Real Estate is a great company that requires its applicants to have college degrees, have a clean criminal record, and has both a criminal and financial background investigation as part of their hiring process.

Case Study On Low Credit Score

My friend, John, graduated from the University of Michigan with a bachelor’s of science degree in accounting and also graduated from Ohio State University with a master’s of business administration and applied for a position with One Solution Real Estate.

  • He had three interviews and was almost sure he would get a job offer. 
  • Unfortunately, he was denied a job due to his low credit scores and poor credit history. 
  • The company had a minimum 680 credit score requirement. 
  • The person who interviewed John liked John very much and told him to see if he can raise his low credit score and reapply. 
  • John went to work and worked on rebuilding his credit.  
  • It took John about a 18 months to have his credit score to surpass the 680 mark and he eventually got a job offer with One Solution Real Estate.

Credit And Career In Financial Services Field

Credit Scores fluctuate up and down monthly especially with consumers with a lot of credit cards. Maxed out credit card balances will lower credit scores substantially.

  • Lower credit scores will not only cost higher interest rates and higher insurance premiums, but it could cost a job candidate a job as well. 
  • Everyone should be conscious of their credit score and check it at least every six months for any errors. 
  • Late payments should be avoided at all cost.
  • One 30 day late payment can drop scores by more than 50 points even if the minimum payment were five dollars.

2015 Update on Employment And Low Credit Score

A low credit score is not the only factor a prospective employer will take a look at when evaluating a job applicant for new hire or for a promotion.

  • They will also review the overall credit history of the job applicant and will pay more attention in the applicant’s credit history in the past 12 months. 
  • Employers will recognize that people go through hard times and a period of bad credit is understandable but not continuous periods of late payments, collection accounts, and charge offs. 
  • They will view job applicants with consistent periods of bad credit and recent bad credit as if the applicant has total disregard for credit and irresponsible

Preparing To Qualify For FHA Loans With Low Credit Score

Mortgage Loan Borrowers with low credit scores should prepare in advance in improving their credit scores prior to applying for a home loan.

Here are ways of maximizing credit scores:

  • Pay bills on time and never be 30 days or more late on any bills that report to credit bureaus
  • For maximum score optimization, keep credit card balances under 10% of credit limit
  • Consumers who have no revolving credit, get three secured credit cards with at least $500 credit limit
  • Do not apply for new credit
  • Do not dispute derogatory items unless there is proof that the derogatory item does not belong to the borrower
  • Whenever consumers applies for new credit, hard credit inquiries will lower scores
  • Go to www.myfico.com and check out the FICO SIMULATOR/ANALYZER. 
  • The above will give case scenarios of potential credit score improvement

Mortgage Borrowers with any further questions on this topic, please contact us at 800-900-8569 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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