homebuyer

How To Purchase a Home When You Have Less-Than-Perfect Credit

How To Purchase a Home When You Have Less-Than-Perfect Credit

While not having such a great FICO Score does make it a little trickier to purchase a home, but there are alternatives out there to help you become a homeowner. Keep reading to discover what you can do to become a homeowner even if your FICO Score is less-than-perfect.

 

Research government-backed funding programs

 

While standard financing programs normally have a minimum FICO Score of 620, government-backed mortgage programs - such as FHA, VA, and also USDA - tend to have looser credit qualifications. In each case, the Federal Government is the entity that backs your loan if you default, which assists lenders with their losses.

 

The minimum FICO Score for each loan type are below:

 

FHA: 500 - 579 FICO Score with a 10% down payment or 580+ FICO Score with a 3.5% down payment.

 

VA: VA loans have no official FICO Score requirements. Instead, each application is evaluated on a case-by-case basis. All though, the mortgage provider you select could have a minimum FICO Score requirement.

 

USDA: Like VA loans, USDA loans have no defined FICO Score requirements. While a FICO Score of 640 is required for a streamlined approval process, homebuyers with lower FICO Scores could be approved based upon extenuating circumstances.

 

Keep in mind that if you're looking at one of these options to purchase your home you should determine if the lender you are wanting to work with has extensive experience. Take your time and research the lender, and do not be afraid to ask questions.

 

Saving More Can Help You Get Approved

 

Keep in mind, your FICO Score is only one of the elements that are taken into consideration when obtaining a mortgage. Your yearly earnings, work history, as well as the amount of money you have saved - or the funds you have for your down payment and closing expenses - will certainly also play a role. If you have a lower FICO Score one of the best ways to get a mortgage is by showing your lender your savings. Tip: The larger percentage of your down payment to your purchase price equals LESS risk to your lender.

 

Take a Look at Portfolio Lending (Owner Financing)

 

If you don't qualify for traditional lending, your lender could offer you another option that is called Portfolio Lending. With portfolio lending(Owner Financing), your lender does not sell your loan to a third-party company like Fannie Mae or Freddie Mac, the lender will maintain your loan as part of their in-house portfolio.

Because your lender is not selling your loan to a third party, they can establish their own underwriting criteria. Additionally, be cautious about the terms the lender offers you. Lenders that provide portfolio lending typically offer higher interest rates, and could also charge more origination fees (Which have to be disclosed). 

 

Work with a Non-Profit that Provides Credit Services

 

If all else fails, you can always find a local non-profit to work with to improve your FICO Score. Do not be afraid to ask for assistance! With all the different pieces of information that go into your FICO score, it is hard to know what piece(s) will improve your score. Design a plan with your counselor that works for you, and provides clear milestones.

 

BONUS TIPS:

 

  1. Know your credit! Get a free copy of your credit report
  2. If you need help understanding your Credit Report….Get Help
  3. If your FICO Score is at or above 620...Great
  4. Find a Lender that you want to work with. There are some great 1st-time home buyer programs out there. Here is a list of them by State
  5. Understand how much you can afford and what costs are part of your mortgage payment 
  6. Save for a Down Payment. As little as 3.5% of the purchase price (Grant options are available)
  7. Know what Closing Costs will be on your loan and have those monies set aside
  8. Start researching homes in your budget 
  9. Attend open houses and THINK…..Long Term
  10. Prepare to close on your new home and move

 

 BONUS BONUS TIPS

 FICO Scores below 620...Here is what you can do to supercharge your Score!

 

  1. Pay off any collection accounts. If you cannot pay off all at once start with the smallest balances. The others work with the creditor on a payment plan that works for your budget. 
  2. Judgments/Liens- Contact the Creditor to work out payment terms. The longer they are unpaid the more accrued interest you will have to pay.