I Have Low Credit, Can I get a Home?
June 5, 2017 | Joshua Kruger
If you’re struggling to get your FICO credit score up above 600; or if you’re slowly tacking extra debt onto your credit cards; or if you haven’t managed to squirrel away tens of thousands of dollars in your savings account—you may be thinking that home loan approval is a distant pipe dream.
In light of the housing crash of 2008, government-subsidized lending options have begun to take precedence while banks have begun reconsidering the way they look at new and first-time homeowners. While applicants once gave up hope if any one of these factors was sub-par, now buyers with seemingly hopeless scores are taking their chances and hoping for the best . . . to the tune of great results.
Scores of Success
While FICO credit scores range from 300-850, most people fall somewhere between 500-700. Once upon a time, you didn’t have a snowball’s chance in Phoenix to get approved for a home loan if your credit score was anywhere below 620. Nowadays, however, FHA loans (guaranteed by the Federal Housing Administration) are being granted to people with scores as low as 580!
Generally speaking, you’re going to have a much easier go of it if your score is 620 or higher, but this step away from conventional loans is the key to accessing the flexibility you’ll need to get approved. Beyond FHA loans, additional credit-challenged-friendly loans include VA loans and USDA loans.
Get Down with Down Payments
You’re probably sitting there thinking that you’re going to need at least 40K available out-of-pocket before you’ll be able to afford the down payment on your home . . . but not necessarily!
While traditional home loans may require up to 20% down payment (especially if you want to avoid MIPs), FDA loans can be attained with as little as 3.5% down—VA loans, on the other hand, require no down payment at all. These government subsidized loans, plus USDA loans, are great options for first-time buyers or credit-challenged borrowers who haven’t had the chance to save a huge sum for a down payment.
The Golden Ratio
Your debt-to-income ratio (DTI) is the third major factor that goes into determining the amount of risk you pose to lenders as a home loan applicant. This number—typically determined by dividing your total monthly debt (including the new mortgage payment) by your monthly income—is usually set to a maximum of 35% for manually underwritten loans. Higher FICO credit scores and down payments may merit the acceptance of a DTI as high as 45%. While most requirements for government subsidized loans are slightly less stringent than those for conventional loans, you’ll find that FHA and VA loan DTI requirements fall within these parameters at an average of 42%.
Making it Work
So, why the relaxed restrictions? Well, to begin with, the government doesn’t pay these loans—they merely guarantee them. Through measures including increased mortgage insurance premiums (MPIs), they can rest assured that they have the means necessary to pay off loans that go into default. In addition, most underwriters nowadays are getting more involved in the process and looking past simple scores to assess the fitness of a borrower. This means that you are more likely to get approved if you have a low credit score but low DTI, or if your low credit is a result of something unavoidable, such as medical bills. Long story short: unless you’re hurting in all of the areas listed above, your chances of getting approved might not be that bad!
Contact us today to discuss your options and see if an FHA loan is the right choice for you!
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