Have you declared bankruptcy? Foreclosed on a home? Taken a hit on your credit score because of late or missed payments? If you have credit problems, do not despair: It is possible to improve your credit score and eventually qualify for a new mortgage loan.
Also, boosting your credit score is not the only means for getting a home loan. The Federal Housing Administration (FHA), in an effort to promote home ownership, has made it easier for people with damaged credit histories to qualify for a mortgage loan. Under certain circumstances, people who have foreclosed or declared bankruptcy can obtain an FHA loan several years earlier than a conventional loan, and can buy a home with a smaller down payment.
How Lenders View Credit Scores
Credit scores indicate to lenders how well you manage money. You can improve bad credit by demonstrating that you can now handle money more responsibly. Furthermore, since a poor credit score translates to a high interest rate on a home loan, an improved score will help you get lower interest rates.
How to Improve Your Credit Score
Here are a few ways to raise your score and ultimately qualify for home financing:
§ Make payments on time.
§ Make payments in full.
§ Do not open new lines of credit.
§ Use credit cards sparingly and do not overextend your line of credit.
§ Show evidence of steady employment for a period of one to two years.
§ Come up with a budget and stick to it.
§ Build savings.
Credit experts recommend spending no more than 25 percent of your available credit on any credit card account. If you have a $1,000 maximum on an account, the balance should not be more than $250 to $300. Better yet, pay off the card and carry no balance whatsoever.
FHA Loans for People With a Damaged Credit History
The Federal Housing Administration offers loans that it insures against default. That means that if the borrower fails to make loan payments, the FHA guarantees that it will cover the debt. Consequently, lenders are far more willing to extend mortgage loans even to people with low credit scores. Furthermore, FHA loans allow you to purchase a home with a down payment as low as 3.5 percent.
However, FHA loans have a downside. First, the loans have relatively low limits. Second, borrowers must pay a mortgage insurance premium (MIP) up front (currently 1.75 percent) and then a monthly premium for a full five years, even if they have built up sufficient equity.
Even so, for someone with a blemished credit history, an FHA loan may just fit the bill. Your state or local government may have a home-buying program, too.