Poor Man Survival
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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.
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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2 comments:
Best thing I ever did was to buy my own home. Good article!
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.
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