Recently I visited with a young couple who was looking to be preapproved for an FHA loan so that they could buy a home. Their excitement was apparent as we went through the application and discussed the different first-time homebuyer benefits and options that are currently available. Unfortunately, the excitement soon dissipated when I pulled their credit report. The couple thought that they had been able to build good credit history, but they were wrong. The husband’s credit scores were below 500 and the wife had no credit scores at all.
If you fail to plan, you plan to fail. For that reason, the first step is to know what a credit report is and how it is derived. By understanding what the goal is, you can work to obtain it.
What factors are a lender going to look at when deciding to issue you credit? On almost all loan applications – whether for a credit card or mortgage — banks want to see that you have the capacity to repay the debt. So, if you don’t have credit history, a lender will look at your assets, stability, and income (or earning potential).
Utilize Someone Else’s Credit. The easiest way to start building your credit history is to utilize someone else’s credit that is already established. If you know someone, such as a family member, that you trust (and they trust you), you can be added onto an existing credit card as a joint account holder. This will include the credit card history into your credit report. Obviously, there is risk in doing this. If the person has previous late payments or suffers from more late payments, this information will go on your credit also. The same applies to maxed out credit limits. So, it could be a good and a bad thing; and therefore, you need to choose wisely.
Remember, now that you know how to be approved for credit, you must build credit with a plan. It is crucial that you do not make avoidable mistakes as this will affect your buying power for years to come.
Credit Score: A statistically derived numeric expression of a person’s creditworthiness that is used by lenders to access the likelihood that a person will repay his or her debts. A credit score is based on, among other things, a person’s past credit history. It is a number between 300 and 850 — the higher the number, the more creditworthy the person is deemed to be.
Now you see that there are three different credit bureaus that report your credit history independent from each other and that they each assign you a credit score that can range from as low as 300 to as high as 850. So how do they do it? In the US, credit bureaus typically use a credit score model called the FICO system. FICO uses mathematical algorithms and statistical models to create your credit score. Although the exact formulas are not made public, the following components have been disclosed.
Many people have recently asked what is the FHA waiting period after bankruptcy, foreclosure or a short sale. In answer, here are the FHA guidelines related to bankruptcy, foreclosure and short sales.
