Yahoo Finance How to Get a Home Loan With Less-Than-Stellar Credit
In a perfect world, you'd have a robust credit score and a 20 percent down payment in hand, with mortgage lenders falling all over themselves to get your attention.
But what if your world is a little dinged? What if your credit score is shabby, your bank manager cringes when he sees you and debt collectors are the ones vying for your attention?
You may be better positioned to buy a house than you think. "As a rule of thumb, a credit score of at least 650 gives you a chance at qualifying for a conventional loan," says Max Galka, co-founder and CEO of Revaluate.com, a New York apartment history and review website.
But even if your credit score is lower than 650, you aren't out of the house-buying game yet. Not by a long shot.
There has been a false narrative circulating ever since the meltdown of 2008 -- that even though interest rates are great, almost nobody can qualify, since the banks pick only the most squeaky-clean borrowers," says Joe Parsons, a managing partner at PFS Funding, a mortgage lender in Dublin, California. "This is so far from the truth as to be almost ludicrous, except that it becomes a sort of self-fulfilling prophecy, where imperfect would-be buyers stay out of the market for fear of rejection."
So if you fear that your basement-level credit score will prevent you from ever having a basement of your own, here are some of your options:
Try getting your house through a Federal Housing Administration loan. If you can't get a conventional mortgage through a mortgage lender, this is the most typical, logical path for a prospective homeowner with bad credit. These are loans offered through lenders approved by the FHA, a government agency within the U.S. Department of Housing and Urban Development, or HUD. You can likely get approved for an FHA loan with a credit score of as low as 580, provided you have enough money saved for a 3.5 percent down payment. If you have an even lower credit score, that doesn't mean you're out on the street. According to HUD's website, your credit score can be as low as 500 -- if you can furnish a 10 percent down payment.
"HUD has upfront and monthly mortgage insurance," says Yael Ishakis, vice president of First Meridian Mortgage in Brooklyn, New York, and author of "The Complete Guide to Buying a Home."
She adds: "The rates are low, and the program is solid. So my opinion is to go ahead, get your home and slowly fix up your credit; and when that time comes, refinance."
For more information on FHA loans, such as where to find an FHA-approved lender, visit fha.com/fha_loan_requirements.
Place more emphasis on income than your credit score. This isn't to say your score isn't important. Having a high credit score is the equivalent of coming home after a long day and having your house key. It's very easy to get into a house when you have a high credit score or a house key. But if you've misplaced your key, the back door might be unlocked, or perhaps you can crawl through a window.
Gregg Ward may be the owner of a San Diego-based consulting, training and coaching firm, but he says he has had a tough time with mortgages due to being self-employed and, on occasion, having a dismal credit score.
"After my divorce, my credit score dropped significantly," Ward explains. Self-employment and a shaky credit score can be a toxic combination.
"I've bought three houses in my life, each time with great difficulty and frustration," Ward says. Still, he has always been able to do it because his income has been strong, in the low six figures. He also says that his mortgage brokers have been aggressive, working hard on his behalf to convince lenders that he is a good risk. So sure, you may have to go look for a back door or a window that's been left ajar when your credit score has taken a beating, but money talks.
You could buy your house through seller financing. This is rare, and the real estate stars need to align just right, but if you find yourself in a similar situation as Ward did, with crummy credit but ample money, consider trying this route, says Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business at Arizona State University.
Seller financing is occasionally done when the seller's own mortgage has been paid off, or if it can be paid off using the buyer's down payment. Instead of paying the bank a mortgage payment every month, you're paying the seller directly, often until your credit is restored enough to where you can refinance with a traditional mortgage lender.
"The big downside is that you will usually need a substantial down payment with seller financing," Orr says. "Sellers need to see that you have some skin in the game and that you will lose it if they have to foreclose."
You could rent to own a house. Also really rare, this is likely to only work if you find a house that's been on the market a long time, with a homeowner who is desperate to sell. If you're desperate to buy, then you two may be a good match. Renting to own a house is when -- with the blessing of your bank or lender -- you begin paying your seller monthly rent, with a significant portion of it going toward the eventual down payment of your home.
After some time, maybe 18 to 24 months, you have the option to buy your house, with the down payment money going toward the purchase price. If at that point, you decide you don't want the home, you can walk away -- but the seller keeps the down payment money you've accrued the last couple years.
You could have a family member with good credit cosign. But just because you can do something doesn't mean you should. If cosigning is your only option, it may simply be a sign that you should stay put and work on managing your money better and rebuilding your credit, so you can get a mortgage. After all, if lenders don't trust you to give you a mortgage without help from family members, maybe there's something to that. Yes, you want the home with the white picket fence badly, but just how badly? If your stressed-out parents are later paying your mortgage because you can't afford it, you may rue the day you asked them to help you get a house.
You also want to make sure you buy a house you can afford. If you find a lender willing to front you enough money to buy a house, but the rates are high and the monthly payments are punishing, you may have won the battle but will lose the war. Getting into a house won't mean much if you have to move out within the year.
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