If you want to buy a home and know that your credit scores are less than perfect all is not lost. What is a less than perfect credit score? The national average for credit scores is 680. So if your scores are less than this, for the purposes of this article your scores are less than perfect.
You do not have to have bad credit to have your scores be less than 680, or less than perfect. If your credit is perfect but you have lower scores, you may ask - what other reasons for why are my credit scores are low. One example may be that you might just have some credit cards that have balances that are over 50% of their allowed limits.
All is not lost in buying a home if your credit report is less than perfect. The same holds true if you do not have enough money to cover the required 5% down payment and closing costs as currently required by Fannie Mae and Freddie Mac.
The FHA home loan program is perfect for lower credit scores. These loans are designed to help consumers buy a home with little or no money for down payment and closing costs and/or lower credit scores.
What are the benefits of FHA Home Loans?
- A small down payment is required for FHA. They will lend up to 97.75% of the sales price. This means you can come in with less than 3% down payment.
- The entire down payment can be gifted to you. The only stipulation is that the gift funds must come from a family member or relative. It can not come from a friend. You can also get it from a nonprofit organization such as AmeriDream or Nehemiah.
- The seller can pay for all of your closing costs up to 6%. This would include all title and escrow fees, lender fees, mortgage insurance premium and other closing costs.
- FHA loans are fully assumable. If someone wants to buy your home they can assume your current loan. They will have to fully qualify however.
- There are no prepayment penalties on an FHA loan. You do not have to worry about being hit with any hidden expenses should you decide that you want to sell in the near future.
- You can have a debt to income ratio – or debt ratio - up to 43% of your gross income. This means that if your bills, including your housing payment, exceeds 43% of your gross monthly income that you might not be approved for the mortgage. It is possible to go higher if you get underwriter approval.
- A non occupant co borrower may be used to help qualify for the loan on a one unit property. A great example would be parents buying a condo for the kid to live in. The kid does not need to have an income. Only the income of the parents needs to be considered.
- FHA allows for financing energy efficient improvements. This includes new windows, air conditioners etc. as long as they rated as energy efficient and have a energy efficient star on them. See GetPreQualified.com’s article on Energy Efficient Mortgages called What is a Green Mortgage?
- There are also special programs for teachers and police officers. You will need to ask your loan officer about these special loan programs.
- You may use FHA Financing to finance a manufactured home.
- You may have a lower credit score 525 – 600 for example and still qualify. You will have to demonstrate your credit payment history for at least the past 12 months up to 24 months depending on what the underwriter asks for.
- You may also qualify for a loan if you do not have a credit report or your credit report shows no active credit accounts. In this case, you will have to establish alternative forms of credit history. An example of this is if you have a cell phone. Make sure the phone account is in your name. If it is then ask the cell phone company for a copy of your account history. There are other ways to show your payment history for many other types of accounts. Check with your loan officer if you need to prove your credit history this way.
For more information on FHA loans visit GetPreQualified.com's articles on FHA Financing.
For more information on improving your credit scores review Tips to Improve Your Credit Scores on GetPreQualified.com. Happy house hunting.
