Your first home purchase can be an exciting and scary time all at once. How do you know if you have everything you need? What if you get turned down? How much home can you afford? These are just a few of the questions that float through people’s minds. Here are 10 tips to help make it easier for you.

1)    Save your money. The more money you can save for a down payment and to cover the closing costs, the better off you will be in the end. A higher down payment gives you more bargaining power on the sales price of the home. It also helps you to secure more lucrative financing. The money you save for the closing costs can also help you secure better financing options. Not too many programs allow you to roll the closing costs into the loan, unless you take a higher interest rate. With it being your first home, you want to keep the interest rate as low as possible in order to keep your payments affordable.

2)    Check your credit. Next to the money you need for your first home purchase is the need for good credit. Everyone is entitled to a copy of their credit report from each of the credit bureaus one time per year. This means you can pull your own credit three times; once every four months is the ideal time. This way you can see what your creditors report about you and determine if it is correct. Sometimes, creditors report inaccurate information by mistake. Other times, something gets overlooked. There could be some instances where you do not even realize that you have bad credit reporting. Knowing ahead of time what your credit report says gives you time to fix it before you apply for financing.

3)    Understand your options. There are many options for financing a first home. Many people think FHA financing is the only option, but there are many other choices. Take your time and do your research to know your options. You might find a great program, such as the USDA mortgage, which does not require a down payment or the FHA loan which only requires a 3.5% down payment. When you know your options, you can compare them side-by-side to determine which one will give you the best and most affordable terms.

4)    Go over your budget. Before you decide on a mortgage, it is important to look through your budget. You might spend more money than you realize each month, making it harder to afford the mortgage payment. Look at obvious things, like any loan payments you owe as well as credit card payments, groceries, utilities, and miscellaneous items. Figure out how well you can afford a mortgage payment as well as where you can make adjustments to your budget to ensure that you do not struggle making your payments on time.

5)    Shop for lenders. You do not have to secure a mortgage from the bank down the street or the bank where you have your checking account. You can secure a mortgage from any lender certified in your state. This could mean shopping online or over the phone for a mortgage. Look for lenders that offer the programs you have the most interest in as well as those that offer loans to people in your situation. There are lenders that cater to first-time homebuyers as well as those that offer FHA and USDA loans. If you do want a government-backed loan, you will need to find a lender that is approved to offer them; not every lender is able to do this.

6)    Get a preapproval from a lender. When you shop around with different lenders, you will receive quotes from them. These quotes are prequalifications; this is different from a preapproval. A prequalification shows you what you might qualify to receive from the lender once you turn in your paperwork that verifies everything you told the lender. The prequalification will not help you when you shop for a home. The preapproval, however, is a statement to a seller that you are preapproved for a specific loan amount and a specific loan program. This means the lender verified your documents and is willing to provide you with the program they offer in the preapproval letter assuming you meet the conditions stated in the letter. This preapproval letter will get you much further when you shop for a home.

7)    Save money for after the closing. After you sign on the dotted line and pay your down payment and closing costs, you still want to have money left over. Moving into your first home costs money. It is not enough to own the home; you will need money for moving, furniture, and turning on the utilities, just to name a few things. Keep this in mind as you get your budget ready for your first home purchase.

8)    Lower your debts. If you have a lot of outstanding debts, now is the perfect time to start paying them off. The less money you have outstanding compared to your available credit, the more favorable a lender will look at you. Typically, lenders do not want to see more than 30 percent of any available credit outstanding as that signifies that you are irresponsible with your finances. Start paying those balances down to get to that point before you apply for any mortgages.

9)    Use a professional. There are many professionals available to help you in the process of looking for a home. You could use a realtor or a mortgage professional that understands your situation. When you have that third party input, you are more likely to make a more rational decision regarding your home purchase.

10)    Really evaluate the home you wish to purchase. Before you sign a sales contract, make sure the home is the one you really want. Do not just visit it once and decide it is perfect for you. Instead, visit it during different times of the day and different days of the week. Check out the neighborhood and the surrounding community as well to make sure you will be comfortable and happy there for many years.

These tips will help you get properly financed and make your first home purchase as stress-free and successful as possible!

With all the recent changes in the residential mortgage lending environment, the most common question being asked is, “What does my credit score have to be to qualify for $X loan amount?”

The answer will vary based on these three factors:

1. Type of Loan Program
2. Loan Amount
3. Private Mortgage Insurance

The credit score that is utilized is the lowest middle credit score of all borrowers from the three credit rating agencies, TransUnion, Experian, and Equifax.

USDA Home Loan

A USDA Home Loan is one of the most flexible when it comes to credit.  You will typically only need a 620 credit score to qualify.  However, if you do not have any credit, including no collection you can qualify as well.  You can still qualify if your score is under 620 as long as there are no collections or judgments or they have been paid off over 12 months ago, and any Bankruptcy has been discharged at least 3 years.  To qualify for the best rate you’ll need a 620 credit score. There is no private mortgage insurance needed on a USDA Home Loan since the loan is guaranteed by USDA.  The loan amount is only limited by what you can qualify for.  You can borrower up to 100% of the purchase price, plus cover closing costs, depending upon the appraisal.

VA Loan

With a veteran loan, you will need at least a 620 credit score.  To qualify for the best rate you’ll need a 700 credit score.  The maximum loan amount in most states is $417,000.  VA does offer a Jumbo product that allows up to a $650,000 loan amount is a 720 credit score.  Since the loan is insured by VA you will not need private mortgage insurance.  The maximum LTV is 100%.

Conventional Loan

With a conventional loan, Fannie Mae (FNMA) or Freddie Mac (FHLMC) you will need at least a 620 credit score.  A conventional loan does require private mortgage insurance if you loan to value (LTV) is over 80% of the purchase price.  To qualify for the best rate you’ll need a 720 credit score. The maximum loan amount, conforming loan limit, is $417,000.  The maximum LTV is 95%.

FHA Loan

The minimum credit score to qualify is 640 with some investors requiring a 660 or higher credit score.  The maximum loan size is limited by county.  The most common loan limit in Indiana is $271,050.  To get the best rate you’ll need a 700 credit score.  There are no further requirements for mortgage insurance since the loan is insured through the HUD.  There will be up-front mortgage insurance premium and a monthly mortgage insurance premium.  The maximum LTV is 96.5%.

Super Conforming Mortgage

If your loan amount is larger than the conforming loan limit, $417,000 but under $729,750 then you can qualify for a Super Conforming Mortgage with a  620 credit score.  To qualify for the best rate on a Super Conforming Mortgage you’ll need a 720 credit score.  You will need private mortgage insurance if your LTV is greater than 80% of the purchase price, the maximum LTV is 90%.

Jumbo Loan

If the loan amount you are looking for is over the Super Conforming loan limit, $729,750, you’ll need a 720 credit score.  To qualify for the best rate you’ll need an 800 credit score.  Since the maximum LTV is 80%, you will not need private mortgage insurance.  The maximum loan amount is $1,000,000 over that you the loan would go to a Private Lender and rates and terms vary widely.

The underwriting standards surrounding private mortgage insurance are becoming increasingly stricter.  Any conventional loan with an LTV greater than 80% will require private mortgage insurance.  To qualify for private mortgage insurance you will need a credit score of 680, you can sometimes get better pricing on the mortgage insurance if your credit score is over 700.  The cost of the private mortgage insurance is typically a monthly amount added to your mortgage payment; however, there are options for the lender to cover the cost through a higher interest rate or discount points, or some combination of the two.

If you are a first-time homebuyer, you have many options at your fingertips when it comes to home financing, even if you have low credit. Now that we are many years outside of the mortgage crisis, lenders are getting a little more lenient with their guidelines. Programs that used to require excellent credit scores of over 700 are now offering loans to people with credit scores as low as 500 in some cases. Of course, these programs are not as readily available as those programs for borrowers with excellent credit, but if you are a first-time homebuyer and have low credit, there are ways to get a loan.

Figure out your Situation

The first step is to figure out your situation. How low is your credit? Why is it low? These are the two most important questions. There is a large difference between having low credit because you made your payments late and ran your credit down and when you have a low credit score because of insufficient credit. If you have a blemished credit history, the best thing to do is to start making things better starting today. If you have insufficient credit, you will need to start getting your alternative credit paperwork ready. Here’s how to handle both situations:

Bad Credit – If you have bad credit, try to do some of the following

• Start making your payments on time, bringing all accounts current.
• Continue making your payments on time for at least one year.
• Save up as much money as you can for a down payment and/or reserves.
• Make sure your income is as stable as possible (avoid changing jobs for the next year or so if you can help it).

Insufficient Credit – If you have a “low” credit score because you do not have any credit, try to do some of the following:

• Find paperwork from any payments you make now that occur on a regular basis. This could include insurance, rent, utilities, and tuition. Canceled checks or letters from the companies you pay will suffice.
• Save as much money as you can for a down payment and/or reserves to make your situation look more promising.
• Make sure your income is stable; do not change jobs within a year or two before applying for the loan.

Once you know where you fall, you can start to make your loan profile look more enticing. Bad credit does not always mean no loan – it just might mean that you have to work a little harder during the months or years leading up to the loan application in order to obtain a mortgage.

Home Loan Options

Today, there are many loan options available for first-time homebuyers. Understanding what each program requires can help you see where you fit in the best.

• Conventional Loans – These are loans that Fannie Mae and Freddie Mac purchase. They are the most common loans on the market because they offer great terms, but they often require stricter guidelines in order to qualify for the loan. The parameters of most conventional loans include:
  • At least a 3% down payment, but if your credit is too low, 5% or higher may be necessary
  • Credit scores typically need to be higher than 660
  • Debt ratios need to be below 43% for your total debt
  • Your income must be stable
  • Your employment must be stable
  • You must not have any collections or judgments that are current

• FHA Loans – FHA loans have less stringent guidelines in regards to credit scores and debt ratios. Many first-time homebuyers find it easier to qualify for this program. The parameters of this loan include:
  • At least a 3.5% down payment if your credit score is above 580. If it is below 580, a 10% down payment is required.
  • Most lenders require credit scores of 580, but the FHA does allow scores down to 500.
  • Debt ratios are usually kept under 31% on the front-end and 43% on the back-end.
  • Income and employment must be stable for the last 2 years.
  • All collections and judgments must be paid.

• USDA Loans – USDA loans are another mortgage product that the government guarantees. The loans are reserved for those with low to moderate income and for homes in rural areas. The parameters of this loan include:
  • No down payment necessary.
  • The home must be within the USDA rural boundaries.
  • The credit score requirement can vary, but 640 is a good cutoff.
  • You do not need a long employment history; you just need to be employed.
  • Debt ratios need to be no higher than 29% up front and 41% on the back.

The answer regarding which loan is best for first-time homebuyers with bad credit is dependent on the exact circumstances. If you have compensating factors, such as long-term employment, a large down payment or 12 months’ or reserves on hand, you make up for the fact that you have bad credit. That being said, every lender and every program view “bad” credit differently, so shopping around with different lenders will help you get the best results regarding which loan is right for you.

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Your credit history plays a vital role in whether or not you get approved for a USDA loan. While it is true that USDA loans have low credit score requirements, the history reported on your credit report is what plays the most important role. The lender for your USDA loan will start by pulling your credit and looking at the actual score. The score is what helps the lender determine your level of financial responsibility. Generally, a credit score below 580 will not be eligible for a USDA loan. Borrowers with credit scores between 581 and 619 are considered high risk borrowers but will generally be eligible for a USDA loan; they will undergo quite a bit of scrutiny in regards to their credit and financial history. The borrowers with these lower credit scores will generally not be eligible for any type of  waiver on their debt ratio (having a high debt ratio) or any other exceptions unless they have a lot of mitigating factors that can make up for their risky credit score. In addition, if a borrower with a credit score within this range does not have housing history reporting on his credit report or a landlord that can provide rental history, the USDA will generally not extend credit for a loan.

Minimum Credit Score for USDA Loans

On the other hand, if you have a credit score that is over 620, the USDA loan requirements make it possible for you to go through a streamlined sort of process for the USDA loan. Borrowers in this category will undergo less scrutiny when it comes to analyzing their loan application. If you have blemishes on your credit report, you will not have to provide proof that it was taken care of because your credit score does the talking for you. In addition, borrowers in this category do not need to provide a housing history, which means that if there is no housing history they could still be eligible for the USDA loan. The only exception to the rule for this category is any type of federal debt that is outstanding and in a collection status; care must be taken to get a payment arrangement to get it paid.

There are a few basic things that the USDA looks for when determining if your credit is worthy of a USDA loan. They tend to focus more on the history itself rather than the score as long as you meet the minimum requirements. The things they look for include:

• The number of late payments. Typically only 1 late payment of 30 days is allowed for the last 12 months in order to be eligible
• More than 3 years must have passed since any bankruptcy or foreclosure discharges
• There cannot be any judgements within the last year
• You cannot have more than 2 late rent or mortgage payments in the last 36 months
• All collections must be taken care of or at the very least, have a payment arrangement
• There cannot be any government debts, whether federal or state level
• No new collections within the last 12 months

The only time the USDA would make an exception to these rules is if circumstances that were not within your control occurred. This could mean that you suddenly became ill or you suffered an injury that made it impossible to work. Even if you were working, if medical bills made it impossible to get your bills paid on time and resulted in collections and poor credit, an exception may be able to be made. You will have to provide plenty of proof that the situation is behind you and that you have made strides to move forward and show financial responsibility. The only debt that an exception cannot be granted is any type of federal debt – at the very least you need a payment arrangement created to get the debt paid down.

Do you think of your credit strictly as a number? Do you think that lenders strictly look to see if you are above the specific threshold that they set and then approve you for the loan accordingly? The honest truth is that they look at so much more than your score. Yes, the score does play a role in your ability to get approved – some lenders will not talk to borrowers beneath a specific threshold, but there is so much more involved in your credit that lenders look at. Here are the 5 C’s of credit that you need to understand in order to get a full grasp on why you do or do not get approved for a mortgage.

The Credit History

The most obvious “C” of the 5 C’s is your credit history. This is what makes up your score. Certain things like late payments and over extending your credit bring your credit score down, while timely payments and using only a small portion of your available credit can boost your score. You can think of your credit history as your report on how you handled your financial obligations. It offers future potential lenders the ability to see how you handled your outstanding credit including how much you used in regards to credit lines, how often you made your payments on time, and how much credit you had outstanding at once. Your credit history plays a major role in your credit score as well as in how the lenders view your risk level.

Your Capacity for a Loan

Your capacity to afford the loan plays a vital role in your ability to gain mortgage approval. Your capacity is determined by your income, assets, and employment history. Each of these factors helps to determine your ability to repay a loan. For example, if your employment history is sketchy, your capacity might be considered limited. What would hold you back from changing jobs again or losing your job because of your inconsistency? Lenders need to take these things into consideration when determining if you are a good risk for a loan.

What’s your Collateral?

You have to give up collateral in order to secure a loan. Of course, with a mortgage, any mortgage, the collateral is the home you purchase or own, if you are refinancing. You have to know the value of this collateral in order to qualify for a mortgage. Most programs require you to have at least 3 percent of your own equity in the property, but there are exceptions to the rule, such as is the case with VA and USDA loans.

What’s your Capital?

Your capital is your assets. This means the amount you can show the lender that you have on hand that is not tied up in your home or any other non-liquid investments. The more capital you have, the less risk you pose to the lender. Your capital can include checking and savings accounts as well as other investments that could be considered liquid, meaning that they could be converted into cash in a short amount of time. There is no specific number necessary for capital that makes you automatically eligible – each mortgage program requires a different amount.

What are your Conditions?

The final “C” stands for conditions. It is the conditions that you bring to the table that determine your riskiness for the lender. These risks could include a variety of things include:

• The amount of money you are borrowing compared to the property’s value
• The history of the property values in the area
• Your income history
• Your employment history
• Your credit history

Overall, these 5 C’s make up your profile for a lender; they look at each of these factors closely to determine whether or not you make a good risk for a mortgage. It also helps to determine what loan program you qualify to receive. No matter what program you wish to qualify for, the process for evaluating your level of risk is the same.

The interest rate is often the most concerning component of a mortgage. People that shop for a mortgage focus solely on the rate. They shop with lender after lender until they find the lowest rate available to them. While this is a great strategy because the interest rate determines how large your payment is, you have some control over your rate simply by increasing your credit score. Your score has a great impact on the rate you are provided, which means if you know your score is low, it might be best to wait until you can improve it to lower your rate.

The Credit Score Breakdown

Most lenders look at credit scores in the following manner:

• Over 800 is considered excellent
• Between 750 and 799 is considered very good
• Between 700 and 749 is considered good
• Between 650 and 699 is considered fair
• Between 600 and 649 is considered poor
• Lower than 599 is considered very poor

Given the above chart, lenders adjust your interest rate accordingly. Typically, if you have a score in the excellent category, there will not be any adjustments made to the base interest rate provided to everyone. The rate tied into the particular program you applied for is what you will get unless you have other factors, such as a higher than average debt ratio or high LTV that make your loan riskier. If you fall in any of the categories below excellent, however; your rate will change accordingly. The further you get down the chart, the higher your rate may become.

How to Improve your Credit

If you have poor or fair credit, you might want to weigh the pros and cons of waiting to obtain a mortgage. If your interest rate will vary more than 1 percent because of your score, you might want to wait until you can increase your score. A few ways to do so include:

• Pay your balances down so that your utilization rate of available credit is lower
• Do not apply for any new credit to avoid inquiries from taking away points
• Make your payments on time
• Let more time pass after a negative credit event, such as a bankruptcy or foreclosure

These few things can help your credit increase dramatically. It will not happen overnight, however, so you will have to take your time and wait for the changes to occur. One last thing you can do is make sure that the credit reporting on your credit report is accurate. Human mistakes get made, which could mean that there are errors on your report. If this is the case, it is important to get them fixed right away. You can do this by contacting the appropriate credit bureau, either Trans Union, Equifax, or Experian, depending on which bureau is reporting the trade line incorrectly. Sometimes the bureau can get the evidence to change your report and other times you are responsible for finding the evidence and making the change happen.

In the end, your credit score has a large impact on your interest rate. You can control how much lenders need to adjust your rate to account for your level of risk. If you do not want to be considered high risk, start working on your credit score now. If you need a mortgage now, at the very least, shop around with different lenders to see who is willing to take your credit score risk at the lowest cost to you. Sometimes you can trade a higher rate for a one-time payment of a discount fee, which can be beneficial if you know you will be staying in the home for the long run.

When you apply for a mortgage, you know that they pull your credit, but what do they look for? Are they looking at the credit score or something else? This is something important to understand so that you can be fully aware of what is going on when you try to obtain a mortgage. The credit score is not the only factor when you are trying to borrow money – your history over a period of time is typically what a lender will look at after ensuring that your score meets the minimum requirements.

The Credit Score

Your credit score can change regularly, typically monthly. It is dependent on different factors including the amount of money you took out of your available credit that month, which changes your utilization ratio; the timeliness of your payments that month; and any inquiries you may have had for new loans or credit cards you applied for during that time. The score might or might not change depending on when you did these things and how drastic the changes were. For example, if you have an available credit line of $5,000 and you maxed out that line to $4,999, your utilization ratio is very high because the entire line is used up. This will negatively affect your score. On the other hand, if you have the same credit line available, but you only charged $100-$200, the utilization ratio is much lower and it might not affect your score.

There are numerous factors that will change your credit score; there is no way to predict what they will do. Of course, it goes without saying, any type of negative behaviors, such as not making your payments on time or stretching your credit limit thin will harm your credit, but just how much you will not likely know. Staying on top of your credit score can help you know when you need to make adjustments, such as paying down your outstanding credit or getting on track with your monthly payments.

The Credit History

The credit history is a bit more complicated. This is where the lender goes through each trade line that reports on your credit report one by one. The lender looks for things like:

• Late payments
• Charged off accounts
• Patterns of financial irresponsibility
• Credit limits and how they are used
• Inquiries and how often they are reported

The credit history can tell a lender a lot about your financial life without every talking to you. They will see when you make your mortgage payments late or when you took out your entire credit line. They will also see accounts that you never paid and had to go to collections. They will also see public records including bankruptcies, judgments, and foreclosures. Each of these items will have a bearing on your credit score as well as your ability to get a mortgage in the future.

Make Sure it is Accurate

The most important thing you can do aside from keeping your outstanding credit at a minimum, paying your bills on time, and minimizing the number of credit lines you apply for is making sure your credit is reporting accurately. Typically, companies report things the right way, but we all know that mistakes get made. Maybe you paid a collection off but it is still reporting as outstanding or you never had a late payment on your mortgage, yet it is reporting 30 days late for one month last year. Whatever the case may be, you have the power to get the report corrected. You have to provide the proof that your reporting is incorrect, however, so keeping your bills, canceled checks, and confirmations from online payments will really help you get things in order. Typically, you can go directly to the reporting agency to get the matter fixed rather quickly.

Understanding your credit score and credit history is an important component of getting a mortgage. You cannot assume that your credit is in good standing because you always make your payments on time. If you don’t have enough credit; you have too much credit; or you have too much outstanding, your score might be lower than you anticipated. In addition, lenders can go as far back as a few years ago to see your payment patterns. It is to your benefit to make sure everything is in order before applying for a mortgage in case you need to make your situation a little more attractive for a particular lender.

It is no doubt that you realize that your credit score has a lot to do with whether or not you are able to qualify for a mortgage, including FHA loans. But, did you know that there is more than meets the eye when it comes to your credit report? The lender you apply with is not only looking at the three scores at the bottom of your tri-merged credit report or even your credit history – they are also looking at your credit inquiries because they can give quite a bit of insight into what you plan on doing with your financial future.

Past Credit Inquiries

The inquiries on your credit report show a potential lender what you have tried to apply for recently. This could be a credit card, installment loan, or even a line of credit. These inquiries are not a guarantee that you took out new debt, but they do alarm the new lender that there could be new debt that is not reporting on your credit report. If the inquiries are rather recent, such as within the last month or two, expect your new mortgage lender to question the inquiries and require proof that you did not take out any new debt. If you did take out a new loan, such as an installment loan, the new payment will need to be figured into your debt ratio to ensure that you still qualify for the FHA loan. If your debt ratio is borderline close to the limit of 43 percent on the back-end, then you might have a little difficulty qualifying for the loan.

What were the Inquiries For?

Another aspect that the new lender needs to evaluate is what the new inquiries were going to be used for – especially if the funds were used to help the borrower qualify for FHA loans. If you have a large amount of reserves to help you qualify for the loan and you have new inquiries for a line of credit, the lender can put two and two together and disqualify you for the loan. It is the lender’s job to ensure that you did not use any of the borrowed funds to help you make your down payment or pay the closing costs on your new loan.

Consider what you Apply for Early in the FHA Application Process

The best way to avoid any confusion when you decide to apply for FHA loans is to avoid applying for any other debt during the few months prior to the application as well as during the time period that your loan is being processed. Most lenders pull your credit at least twice, once at the time of application and then again right before closing. This helps them to see if there were any new inquiries on your credit report as those report right away. Even if a new debt is not reporting on your credit report right away, the inquiry is enough to get a lender to be suspicious about what you have going on in your financial future.

Don’t look at the fact that lenders need to look at your credit inquiries as a bad thing; they are just trying to protect themselves as well as you from financial ruin in the future. It is the lender’s job to ensure that you can afford the loan not only based on your past income and debt, but on what they can predict for the future. The inquiries on your credit report provide quite a bit of insight into your financial future, so it makes sense that lenders will use it. They can show you how the new debt can make your debt ratio skyrocket, which could make it difficult for you to pay your debts in the future. Holding off on any new credit cards, auto leases, and installment loans is a good idea until you are done with the process of getting a new mortgage loan.

Your credit score is one of the first things lenders look at whether you are applying for a conventional, FHA, VA, or USDA loan. For that reason, you should understand what your credit score is made of and why you need to worry about it when you apply for a conventional loan. Generally, credit scores are comprised of 5 different parts, but the largest two that you need to worry yourself with include:

• Payment History
• Amount Owed

Payment History

The payment history on your credit report is the most important component of your credit report. In fact, it makes up 35 percent of your credit score. This is the part of the score that is tied into how many late payments you have. The most recent late payments affect your score the most, but every late payment negatively affects the bottom line. In general, late payments remain on your credit report for up to seven years as seven years is the statute of limitations, which means they can no longer report after that length of time. Your most current payment history with each lender will be reported as follows:

• Paid as agreed
• Up to 30 days past due
• Between 31 and 60 days past due
• Between 61 and 90 days past due
• Sent to collections
• Not being used
• Account in payment agreement or bankruptcy
• Repossession
• Charged off account

The most recent status will report on the credit report. For example, if you are 33 days late on an installment loan, the current status will report that it is between 31 and 60 days past due. If you catch up on the payments and end up current on that payment, it will then report paid as agreed on the next month, but the 60 day late will continue to report for the next seven years, affecting your credit score accordingly. The more time that passes since the delinquent payment, the less it affects your score, but it does not completely diminish for 7 years.

Amount Owed

The amount you owe on each of your accounts plays an important role in your credit score as well. It is not so much the fact that you owe money, that is a given; it is the amount of money that you owe compared to your available credit that matters. Take into consideration the following scenarios:

• Your credit limit on a revolving credit account is $1,000 and you have $899 outstanding. In the eyes of any new lender, this is a large amount of money and shows that you tend to overextend yourself financially.
• You have a credit limit of $1,000 and you have $200 outstanding. In the eyes of the new lender, you are responsible with your available credit. You do not overspend and you keep your credit at a level that you are comfortable with paying it back.

Between those two scenarios, the person that has only $200 outstanding will have the higher credit score based on credit utilization alone. Since this component of the credit score is 35 percent of the score, it can greatly impact your score, and your ability to get a conventional loan. In general, high balances on revolving accounts have a higher impact on your credit score than high balances on an installment loan since on an installment loan, you are given the total amount; you are not able to use, repay, and reuse the credit given. If, however, overall you have a large number of accounts with a balance, your credit score will be negatively impacted.

While you need to focus on every aspect of your credit score, the payment history and the utilization rate are the two components that you need to worry about the most. By making your payments on time and keeping the amount of credit you have outstanding in check, you maximize your chances of having a higher credit score that enables you to be a good candidate for a conventional loan.

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The FHA loan has always been known to allow low credit scores. In fact, the FHA only requires a score of 500 in order to get approved. Of course, you have to put down 10 percent or more if your score is that low, but you can still get the loan, according to the FHA. That is not what most lenders say, however. They typically create their own rules on top of those of the FHA in order to ensure that their default ratio is low. Why would a bank care so much about their default ratio on a loan that is backed by the FHA, which means the FHA will pay them back for the loan if it is defaulted on? It’s simple – the FHA actually penalizes banks that have a higher than normal default ratio. But things are about to change in that arena fairly soon.

The New FHA Rules

Prior to late last year, FHA lenders were compared to one another based on their default rates. Every lender within a specific region was compared to each other. If one lender had an FHA default rate of 3% and another had a default rate of 10%, the lender with the 10% default rate would more than likely get its rights to provide FHA loans revoked. Unfortunately, the way the lenders were compared was not fair – there was no categorizing of the loans, which meant that if the lender with the 10% default rate simply went with the FHA guidelines, allowing loans for borrowers with credit scores as low as 500 while the first lender did not allow any loans with a credit score lower than 640, it was not a fair comparison. The FHA has since realized this issue and has changed the way it compares lenders.

Today, the FHA compares lenders nationally, not just in a geographic area and each loan is put into a category based on their credit score. This means that the default rate of loans with a credit score in the 500s will no longer be compared to the default rate of loans in the 650s, as an example. The FHA has its own level of categorizing and is much less stringent about revoking the right to provide an FHA loan to borrowers.

How the Borrower Benefits

So how do you benefit from the new rules regarding the comparative ratio? It’s simple – more lenders are going to be willing to provide FHA loans to borrowers with lower credit scores. Now, they might not go as low as 500, but they might be a little more flexible than the standard 640 or higher that most lenders stuck to in the past. Because the penalties are not as harsh, lenders are able to bend their own rules slightly.

This means that if you have a credit score on the lower end, you might have a better chance at getting an FHA loan today. Of course, not every lender is going to be willing to take on a low credit score despite the lower risk of being revoked from providing FHA loans because they are just not comfortable with it. There are lenders that will though; the FHA predicts that more than 100,000 borrowers will now be eligible for FHA financing as a result of the changes.

If you are in the market for an FHA loan and you have lower credit scores, do not give up. Shop around with various lenders to see who will be willing to take the chance. Of course, the more compensating factors that you have to show the lender, such as a low debt ratio and stable employment, the higher your chances are of getting approved.

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