FHA Loan Approval: What it Takes
January 8, 2022
There are three separate areas that affect your lender’s decision to approve or deny your home loan application. If you start preparing for your loan in advance and anticipate these three areas, you can help yourself get much closer to loan approval.
What are the three areas? They are your FICO scores (you have more than one), your credit utilization, and your debt ratio. These three areas are NOT the only ones you will need to pay attention to, but they are among the most important.
FICO Scores
There are FHA credit score requirements, and lender standards in this area. On paper, FHA loan approval guidelines say that FICO scores 580 or higher qualify for the lowest down payment (3.5%).
But FHA standards may be more forgiving than the participating lender’s requirements. You may find that FICO scores in the mid-600s are required by some lenders. It pays to compare lenders even if you feel your credit scores are in good shape.
FICO scores cannot change overnight. If you adopt the best practices of improving your credit scores (pay on time, every time, reduce your credit card balances well below 50%, avoid carrying too much credit card debt) your scores will improve over time. It’s wise to allow that process more than enough time to work.
Credit Utilization
What we mentioned above about lowering your credit card balances well below the halfway mark? That affects your rate of credit utilization. If you carry low balances on your credit cards, this is interpreted as responsible credit use. Ideally you want to shoot for using about 30% of your credit limit but no more.
That might sound like a tough goal to meet, but there are techniques you can use to pay down credit card debt and get ahead in this area. Some choose to focus all their paying power (after monthly minimums are paid) on one card until the debt is paid down. Others may choose to consolidate debt. But whatever option you seek, make sure you can realistically lower your credit utilization over time.
Debt Ratio
How much monthly income do you have after all your monthly debt has been paid? That is an important factor because the lender will actually run those numbers to see what percentage of your income is taken up by those monthly bills. You want to reduce your debt ratio as much as possible in the planning and saving stages of the home loan. Don’t “save” this until you are closer to applying for the mortgage for the same reason you don’t want to delay working on your credit scores. It takes time to lower your ratio and you will be glad you gave yourself the extra time to pay down and prepare.
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Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
What are the three areas? They are your FICO scores (you have more than one), your credit utilization, and your debt ratio. These three areas are NOT the only ones you will need to pay attention to, but they are among the most important.
FICO Scores
There are FHA credit score requirements, and lender standards in this area. On paper, FHA loan approval guidelines say that FICO scores 580 or higher qualify for the lowest down payment (3.5%).
But FHA standards may be more forgiving than the participating lender’s requirements. You may find that FICO scores in the mid-600s are required by some lenders. It pays to compare lenders even if you feel your credit scores are in good shape.
FICO scores cannot change overnight. If you adopt the best practices of improving your credit scores (pay on time, every time, reduce your credit card balances well below 50%, avoid carrying too much credit card debt) your scores will improve over time. It’s wise to allow that process more than enough time to work.
Credit Utilization
What we mentioned above about lowering your credit card balances well below the halfway mark? That affects your rate of credit utilization. If you carry low balances on your credit cards, this is interpreted as responsible credit use. Ideally you want to shoot for using about 30% of your credit limit but no more.
That might sound like a tough goal to meet, but there are techniques you can use to pay down credit card debt and get ahead in this area. Some choose to focus all their paying power (after monthly minimums are paid) on one card until the debt is paid down. Others may choose to consolidate debt. But whatever option you seek, make sure you can realistically lower your credit utilization over time.
Debt Ratio
How much monthly income do you have after all your monthly debt has been paid? That is an important factor because the lender will actually run those numbers to see what percentage of your income is taken up by those monthly bills. You want to reduce your debt ratio as much as possible in the planning and saving stages of the home loan. Don’t “save” this until you are closer to applying for the mortgage for the same reason you don’t want to delay working on your credit scores. It takes time to lower your ratio and you will be glad you gave yourself the extra time to pay down and prepare.
------------------------------
Learn About the Path to Homeownership
Take the guesswork out of buying and owning a home. Once you know where you want to go, we'll get you there in 9 steps.
Step 1: How Much Can You Afford?
Step 2: Know Your Homebuyer Rights
Step 3: Basic Mortgage Terminology
Step 4: Shopping for a Mortgage
Step 5: Shopping for Your Home
Step 6: Making an Offer to the Seller
Step 7: Getting a Home Inspection
Step 8: Homeowner's Insurance
Step 9: What to Expect at Closing
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