FAQs for First Time Homebuyers: Where Does My Credit Need to Be?
While your immediate thought may be that your credit needs to be good in able to qualify for a loan (especially in light of the recent mortgage crisis), the answer is actually dependent on what kind of loan you apply for and what you have to put towards a down payment. If you have bad credit or little to put towards a down payment, you’re not completely out of luck.
Although lenders have seriously tightened the reins since the mortgage crisis, they will lend to those with not-so-pretty credit but they will most likely require mortgage insurance. Mortgage insurance is offered for those who qualify by the three government agencies that I mentioned in the last blog: the Federal Housing Administration (FHA), the Department of Veterans Affairs, and the U.S. Department of Agriculture and Rural Development (USDA). The FHA will not only consider those with poor credit but also those who have a foreclosure or bankruptcy in their past. FHA guidelines require a wait period of 2-3 years after a foreclosure or bankruptcy, but they will be looking to see if you’ve kept your credit clean since that time.
Despite the current climate of the housing market, there are still some private lenders that will lend to borrowers with poor credit, but this route is strongly not recommended. If a private lender is willing to let you borrow from them with poor credit, you will almost certainly have to pay a higher interest rate.
Many of you already know your credit (or FICO) score. If you don’t, please do not wait until you apply for a loan to find out. Educate yourself on your own credit history first! Misinformation on your credit report can be very common, and you’ll want to inquire about any erroneous accounts BEFORE going forward in your home buying process. The Federal Trade Commission will provide you with a free credit report annually. Go to http://www.ftc.gov/bcp/edu/microsites/freereports/index.shtml
Bankrate.com provides an estimate on how your FICO score will affect your interest rate on a loan:
760 to 850 – 5.780%
700-759 – 6.002%
660-699 – 6.286%
620-659 – 7.096%
580-619 – 8.583%
500-579 – 9.494%
Keep in mind, that your credit score is not the only factor lenders will take into account. A large down payment could save you from a high interest rate, as well as a low debt-to-income ratio. However, when it comes to borrowing with poor credit, the most important thing is to consider the overall picture. If you’re already struggling to keep up with bills, is homeownership really right for you? Don’t forget that owning a home requires more than just paying the mortgage, it also requires any maintenance costs. On the other hand, your credit history may not hold much value if the benefits of owning outweigh the negatives. In some areas of the country, owning is still better than renting. Furthermore, paying your mortgage on time each month can significantly improve your credit in the long run. Just make sure to borrow within your means. As per usual, carefully evaluate your individual situation before contacting a lender.
Courtesy of:
TLC.howstuffworks.com
HUD.gov
Bankrate.com
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