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Thursday, February 1, 2018

How to Buy a House - Even With Bad Credit


Poor Man Survival

Self Reliance tools for independent minded people…

ISSN 2161-5543

A Digest of Urban Survival Resources


How to buy a house with bad credit, step by step

1.       First, you generally need to contact a HUD-approved housing counseling agency for a one-on-one consultation with a housing counselor.

2.       A housing counselor will be familiar with all the special financing programs available for people with bad credit in your area.

3.       They will also help you find a homebuyer workshop; taking this course is often required to qualify for bad credit loan options.

1.       If you take the course in person locally where you live, you can usually find a free course.

2.       You can also take the course online on your own time, but usually for a fee; online course fees usually run around

4.       Once you complete the course, you receive a certificate that you can provide when you apply for financing.

5.       Now you can begin shopping for FHA loans; these are loans financed through Federal Housing Authority.

What do I need to qualify for an FHA loan?

1.       Your loan will not come directly from the FHA; instead you get an FHA loan through the private lender of your choice.

In general, FHA loans only require a FICO score of 560 or more. That’s considered a “poor” FICO score. In addition to allowing you to qualify for loans with weak credit, a homebuyer course completion certificate can also help you qualify for first-time homebuyer assistance programs, such as down payment and closing cost assistance.

·         An FHA-approved lender

·         FICO score of at least 560

·         Down payment of at least 3.5% of the home’s purchase price

·         Extra money to cover mortgage insurance

Anytime someone puts down less than 20% on the purchase of a home, the lender will add Private Mortgage Insurance (PMI). This is basically extra money added to your monthly mortgage payment. You pay until you’ve paid off 20% of the home’s value; then PMI drops off and your payments will be reduced.

What to do if you still don’t qualify to buy a house?

If you still can’t qualify, even for an FHA loan, then you need to take steps to make yourself more “creditworthy.” This means taking steps to improve your credit score and decrease your debt-to-income ratio. And, if your FICO score is below 550, it may take as little as six months or less to get where you need to be.

1.       First your review your credit report to see what negative information is decreasing your score.

2.       If there are report errors that are contributing to your lower score, you can repair your credit to get them removed within 30 days.

3.       Then you can implement a strategy to build credit. When you have bad credit, this usually produces results within 6 months.

Often, it’s good to have a tool that tells you where you stand. Credit monitoring and ID protect tools give you access to your three credit reports, plus credit score tracking. This can make it easier to know where your score is, so you know exactly when it’s the right time to apply for a mortgage.

Can I buy a house with a 600 credit score?

A: If you have a 600 FICO credit score, then you may not need to go through FHA to get a loan. In this case, you may be able to qualify for non-government-insured financing. Loan qualification varies by lender. Some lenders have stricter standards than others. In some cases, you may be required to use a product like an Adjustable Rate Mortgage (ARM).

Some lenders have also relaxed down payment requirements. If you buy a Fannie Mae backed home, new rules started in 2017 allow you to buy a home with as little as 5% down. Again, you must pay PMI until you’ve paid off another 15% of the mortgage, but it drops off. You can also qualify with a higher debt to income ratio. The previous cut off was 41% or less. Now you can qualify as long as your DTI is between 45% and 50%

Is 700 a good credit score to buy a house?

A: A 700 FICO score is the bottom of the good credit score range (it goes from 700-749). This puts you in an excellent position to buy a home. With a good credit score, you can qualify for fixed-rate mortgages and adjustable-rate mortgages. You can basically choose the home loan that fits your needs and budget.

You should also be able to get a better interest rate with a good credit score. The higher your score, the lower the rate. That means lower interest charges over the life of your mortgage; you essentially pay less to borrow than someone with bad credit.

What credit score is needed to refinance a home?

A: In general, refinancing requires the similar scores to loan origination (when you first buy a home). The key is that you need a better credit score than when you first took out the mortgage.

If you qualified for an FHA loan at a 560 FICO, then a few years down the road your credit score has improved to 700, consider refinancing! You are likely to qualify for a lower interest rate, which could also lower your monthly payments. Just be aware than other factors affect mortgage rates, such as prime rate changes by the Federal Reserve.

If you’re in doubt, ask a lender for a quote or use an online quote comparison tool to get several quotes. This will help you judge where rates are and what you can qualify for now that your score is higher.


What about you? Got anything interesting to share?

Bruce, the Poor Man, free thinker, social critic & cynic


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DAR said...

Best thing I ever did was to buy my own home. Good article!

Dave said...

Just about everyone I know has bad credit today. The collapse of '09 did a lot of us in [thank you Wall Street]. So this info is helpful.