Getting A Mortgage with Sub-Par Credit
If you have poor credit, now is the time to try and bring up your credit score. By increasing your credit score, you will be able to attain a mortgage on more favorable terms and with lower interest rates.
Let’s look at how the mortgage banking industry treats consumers who have poor credit scores.
Get Copies Of Your Credit Reports
The first thing you will need to do is access your credit score. By law, you are entitled to a free copy of your credit report every year from the three major credit bureaus. Now, if you are trying to get a mortgage, the lender will most likely be looking at your FICO score. For this score, you do need to pay. CreditKarma, offers an approximation of your FICO score for free with their credit report.
Once you have your score, here is how you can interpret the ranges:
- 620 is poor,
- 620-699 is fair
- 700-749 is good
- Above 750 is excellent
Conventional Loans May Not Be For Those With Poor Credit
The advantage of conventional loans is twofold. One, you don’t have to have mortgage insurance. The second advantage is that the terms are more favorable than government-supported loans. These loans are generally not available to borrowers whose credit scores are below 680. Moreover, as your score gets lower, the required down payment goes up. The maximum debt-to-income ratio (DTI) (amount of your income that goes towards monthly debt obligations) ratio for conventional loans is between 43%.
Look into home loans in your area
There are programs in your area for poor credit and first time home buyers. This includes VA financing (zero down), FHA mortgages (as little as 3.5 percent down), Fannie Mae HomeReady mortgages (3 percent down), USDA mortgages (zero down), and Freddie Mac Home Possible loan (3 percent down).
FHA Loans Are the More Likely Route
If your credit score is under 650, The Federal Housing Authority (FHA) has a program that will insure your loan against default. You are just required to put a down payment of 3.5% of the home’s value on the table. While the FHA will extend this insurance to borrowers all the way down to a poor credit score of 580, most lenders will not bite below a 620 score.
Remember, the FHA doesn’t lend, it just guarantees in the event the borrower defaults. If the banks are not confident that home values are going up, they won’t issue a mortgage. It’s therefore more likely that you will need to put down a down payment of around 10%.
The Proof of Income Requirement
FHA loans require both a sufficient credit score and proof of income. These figures will be used to determine your debt-to-income level. The FHA follows more relaxed guidelines than do conventional loan issuers for this ratio. You will only need to show that the debt payments come to no more than 50% of your income. Just remember, debt payments include not only the mortgage, but also all other monthly debt payments.
In response to the hardships that have been inflicted by the lingering financial recession, the FHA has produced its “Back to Work” program. This program allows people who have suffered a demonstrable financial set-back to qualify for a mortgage loan after a period of unemployment or under-employment. If you think you fit into this category, the FHA’s Back to Work program may be for you.
Owner Carry is another option for homeownership
Another method for acquiring home ownership when you have poor credit is called owner carry. This is when the seller is financing the mortgage of his own home. Payments are directly made to the seller along with monthly deposits that go toward a later down payment. The seller will carry the mortgage for a certain period of around five years. After this time, the monthly deposits that were being made are put towards a balloon payment that will serve as a down payment. There is also the option to arrange for a regular mortgage. This process assumes that the buyer will be able to repair his or her poor credit prior to seeking the regular mortgage.
Consider a portfolio refinance loan
A portfolio loan is another option when you have poor credit. You can get one through a bank or a mortgage broker. The standards do differ from typical loan requirements but that does not mean they are easier to get approved for. You can expect your finances and credit history to be looked at.
Home Ownership Hope For Those With Poor Credit
There is hope for home ownership even if you have poor credit. Whether you go with a FHA loan or private arrangements with willing sellers, there are definitely options available to you. The key to setting out on a path to homeownership starts with careful spending and saving. As long as you stay the course, you won’t have to wait forever to own your own home.