Buying a Home with Less Than Perfect Credit

Buying a Home with Less Than Perfect Credit

As I’ve previously noted, getting a home loan these days can be extremely difficult unless you have a 20% down payment, a credit score in the mid 700’s and sufficient income so that your housing costs are no more than 28% of your gross income.  In fact, according to the Financial Institutions Examination Council, roughly 25% of all conventional home loan applications are rejected. 

These stringent qualification requirements are for loans backed by Fannie Mae and Freddie Mac, but luckily they aren’t the only game in town.  Today, more and more borrowers are taking advantage of the less demanding criteria for FHA loans.

The Federal Housing Administration has been in existence since 1934 and has become the largest government insurer of home loans in the world today.

Although every lender might have slightly different requirements, here are the basics needed to qualify for an FHA insured loan:

• Technically, 580 is the minimum acceptable score, but in practice lending institutions require a minimum of a 620 mid score.  The mid score is the middle score when credit is pulled from all three major reporting agencies; Experian, Equifax, and Transunion.
• Housing expenses, (mortgage, taxes and insurance) must not equal more than 31% of your gross income, and all payments, (including cars and credit cards) must not exceed 43%.
• The down payment must be at least 3.5%.  If the down payment is less than 10%, most lenders require a credit score of 640.
• There is also an Upfront Mortgage Insurance Premium paid at closing and usually financed into the loan.  This premium is 1.75% of the base loan amount.  There is also an annual premium of 1.25% paid on a monthly basis. 

An FHA loan is an excellent choice for first-time buyers, or anyone with less than perfect credit or a small down payment.  If you’re thinking of buying in San DiegoCounty, just give me a call!  The time to get qualified is before you start looking for a home.  There is nothing worse than finding the perfect home, only to discover you can’t get a loan!