A loan is a major expense. But it can be even more costly when your credit score is less than perfect as you may end up being charged a higher interest rate for a subprime loan.
How do you avoid having to pay a higher rate? One way is to pay down your debt, and establish a good track record of paying your bills on time. But it can take up to a year to show results.
There is another way, however, and thats to consider an FHA (Federal Housing Administration) loan. These loans use different criteria than other loans, and that may allow lenders to offer you terms only slightly higher than market rates -- in some cases, as little as .125 percent higher.
FHA loans
Its important to understand what an FHA loan is. Contrary to some peoples belief, the Federal Housing Administration is not a lender. It is a federal government agency that guarantees loans by private lenders, making loans available to people who may have a difficult time qualifying , often because of a lack of credit history. This includes recent college graduates, newlyweds, as well as people who have had credit problems including bankruptcies and foreclosures. Since an FHA loan is government-insured, lenders granting these loans assume less risk than they do with other low credit score loans and therefore can extend credit at a more reasonable interest rate.
How to qualify
The qualification criteria for an FHA loan are different than they are for a conventional loan. While your credit score is usually the most important factor lenders consider when approving you for a conventional loan, with an FHA loan its not the central consideration. Rather, the FHA looks at your overall credit history, and is often more flexible in considering mitigating factors.
That doesnt mean you dont have to get your credit under control. The FHA requires a one-year period of acceptable credit, during which you have made all your payments promptly. It may review your rental or loan payment history during that time, any new credit or credit inquiries, and whether you have paid off any judgments against you. And it considers your debt-to-income ratio to ensure youll be able to repay the loan.
How do you avoid having to pay a higher rate? One way is to pay down your debt, and establish a good track record of paying your bills on time. But it can take up to a year to show results.
There is another way, however, and thats to consider an FHA (Federal Housing Administration) loan. These loans use different criteria than other loans, and that may allow lenders to offer you terms only slightly higher than market rates -- in some cases, as little as .125 percent higher.
FHA loans
Its important to understand what an FHA loan is. Contrary to some peoples belief, the Federal Housing Administration is not a lender. It is a federal government agency that guarantees loans by private lenders, making loans available to people who may have a difficult time qualifying , often because of a lack of credit history. This includes recent college graduates, newlyweds, as well as people who have had credit problems including bankruptcies and foreclosures. Since an FHA loan is government-insured, lenders granting these loans assume less risk than they do with other low credit score loans and therefore can extend credit at a more reasonable interest rate.
How to qualify
The qualification criteria for an FHA loan are different than they are for a conventional loan. While your credit score is usually the most important factor lenders consider when approving you for a conventional loan, with an FHA loan its not the central consideration. Rather, the FHA looks at your overall credit history, and is often more flexible in considering mitigating factors.
That doesnt mean you dont have to get your credit under control. The FHA requires a one-year period of acceptable credit, during which you have made all your payments promptly. It may review your rental or loan payment history during that time, any new credit or credit inquiries, and whether you have paid off any judgments against you. And it considers your debt-to-income ratio to ensure youll be able to repay the loan.