Know the Common Credit Qualifying Criteria

What  FHA loan requirements are a lender going to look at when deciding to issue you credit for an  FHA loans? On almost all FHA loan applications banks want to see that you have the capacity to repay the debt. So, if you don’t have credit history with regard to FHA guidelines a lender will look at your assets, stability, and income (or earning potential).

Assets- With respect to FHA loan requirements it is very important that you open and maintain bank accounts. By doing so, you have documentation of your ability to budget and save, thus demonstrating financial responsibility. I recommend that when you are starting out and choosing a banking relationship that you look for a local community bank or credit union.  FHA Loan guidelines do not require a small bank, however many times smaller, customer-centric, institutions know you individually and not as just an account number. Because of that, they may have lower banking fees and more flexible lending criteria. You may have an opportunity to sit down face-to-face with your banker who will look at your total financial scenario and potential vs. having to apply by phone or internet to a faceless automated system that approve you only on your credit score. Many local community banks and credit unions have lending programs designed specifically for people who are looking to establish their credit history because they want to gain your long-term business. Just make sure that they actually report your loan information to the credit bureaus.

Stability- With respect to FHA guidelines many lenders want to see how long you have been at your current address and how often you move. Frequently moving isn’t necessarily a reason to be declined (unless you are breaking leases and defaulting on contractual obligations), but stability does go a long way to compensate for a lack of credit history for FHA guidelines. One of the key factors of stability is establishing sources of “alternative credit”. For that reason, it is important that you try to create a history of documented bills in your name such as rent, utilities, auto insurance, phone or cell phone, etc (paying a friend or family member probably won’t do the job). Although they typically do not show up on your credit report, they can be used by a lender to issue credit. In fact, FHA guidelines will allow you to qualify for a FHA loan even if you have no credit history and FICO scores if you can document three “alternative credit” sources with at least a twelve month history of on-time payments.

Income (or Earning Potential)- Your income will be a key factor in establishing credit. FHA guidelines want to see that you have stable employment and sufficient income to repay the debt on top of your standard living expenses. If you are a college student and you are not working, take advantage of the opportunity to apply for “student credit card” offers. Lenders are willing to approve you for an  FHA Home loans based on your future earning potential and they are looking to capture your long-term business. However, please understand that obtaining credit card debt that you max out or cannot maintain is very bad and can seriously derail your opportunities to establish high caliber credit history.