Finally, one of the more common reasons why an individual’s credit score begins to ount of revolving debt, typically in the form of credit cards. Credit agencies place heavy emphasis on what is commonly referred to as an individual’s debt-to-credit ratio, also referred to as their credit utilization ratio. This data point provides a brief overview of how much available credit an individual has used and how much they have remaining.
Much like multiple applications for new credit lines may signal that an individual is experiencing financial hardship, an inordinate amount of credit usage will typically indicate a similar situation. When assessing your credit utilization ratio, you simply divide the amount of credit card debt you currently have by your total credit allowance. For example, if your credit line is $20,000 and you currently have used $8,000 of this, your credit utilization ratio would be 0, or 0.4. As a broad rule, credit agencies will tend to view credit utilization ratios above 0.5 with some degree of concern.
Housing Assistance for Bad Credit
In situations where you would like to apply for a home loan but have a poor credit history, you may discover that the initial terms offered to you by a standard mortgage lender are not in your favor. For example, high interest rates could cripple your ability to build your savings throughout the duration of your mortgage repayment. Fortunately, a variety of federal agencies and nonprofit organizations offer assistance to future home buyers who find themselves in this situation.
Perhaps one of the most often-used resources for homebuyers is the Federal Housing Administration, also known as the FHA. The FHA acts as a branch of the Department of Housing and Urban Development. Generally speaking, the FHA offers homebuyers the chance to purchase properties at significantly lower interest rates compared to what may be available through private lenders. This is done through collaboration with private lenders in which the FHA acts as an insurer of the loan rather than the provider.
Exploring the FHA
Since it was first established in 1934, the FHA has worked with homebuyers across the country to ensure they can secure viable payment plans for the property they wish to own. Whereas bank lenders may offer to reduce interest rates on a property in exchange for a significantly higher down payment, the FHA will typically seek to ease payment burdens on both the down payment and monthly payment rates for buyers.
Currently, the FHA will allow an individual to qualify for their assistance if their credit score is above 500. When a borrower has a credit score between 500 and 579, the FHA will typically stipulate that a 10% down payment must be made, a rate that is still far below the 20% commonly requested by private lenders. In the event that a borrower has a credit score above 580, the FHA will guarantee the loan as long as they make a down payment of, at minimum, 3.5%.
These statistics alone demonstrate just how significant the assistance provided by the FHA can be. In a situation where a borrower chooses to seek funding from a traditional bank, they will typically be required to purchase private mortgage insurance if their down payment falls below 20%. The premiums involved with private mortgage insurance can dramatically increase the size of a homeowner’s monthly payment, given the fact that installment loans Illinois they will now be paying for both the mortgage itself and the insurance used to cover it.
Evaluating the Logistics of the FHA
As mentioned previously, it is important to make clear that the FHA does not provide mortgage financing for homeowners. Instead, it insures a mortgage issued by a private lender to the borrower seeking FHA assistance. With that in mind, borrowers who successfully apply for FHA assistance will still be required to apply for a mortgage through a standard lender. The borrower will also need to ensure that the lender they apply to accepts FHA-assisted applications.
