Q: My credit score is low at 540, I’ve been saving and I have at least $13,000. What should I do to buy a home?
A: Good for you on saving a down payment. What caused your credit score to be low?
I would suggest sitting down with a loan officer and going over your file and credit report to see what can be done to improve your score and if there are any other road blocks to you qualifying for a loan. Please do this face to face with a local lender, that is only way you will be able to come up with a plan to get you into a home and find you the loan that best suits you.
With your marginal credit score you will not have many options for obtaining a loan.
The FHA has their own guidelines for loans they will accept and may be your best bet. Keep in mind that FHA is not a bank; it’s a government agency that insures loans from FHA approved lenders. While the FHA will have its rules, a bank will also have its own rules as well. Most banks today are only willing to finance FHA loans with credit scores of 640 and above. The FHA however will allow loans with credit scores as low as 540 with 20% down. Additional requirements are as follows:
• Two Years of steady employment, preferably with same employer. Last two years Income should be the same or increasing.
• Credit report should typically have less than two thirty day late payments in last two years with a minimum credit score of 640 or higher…
• Bankruptcies must be at least two years old, with perfect credit since discharge.
• Foreclosures and Short Sales must be at least three years old, with perfect credit since.
• Your new mortgage payment should be no more than 40% of your gross (before taxes) income.
•You will need a minimum down payment of 3.5% of the purchase price. The down payment can be a gift.
• Social Security Card-many people don’t know where their card is. You will need it.
Conventional loans are typically for borrowers with 10-20% to put down and good credit scores. Most lenders in today’s market require a middle credit score of 660 or better to qualify for a conventional loan. To get your best deal you will need a credit score of at least 720. Since conventional loans are approved through underwriting engines created by Freddie Mac and Fannie Mae, the higher your credit scores are the better rate you will get. Conventional loans currently require a minimum of 5% down.
Interview mortgage brokers and obtain recommendations from them to find the loan that works best for you. Your new mortgage broker will then be able to show you an entire suite of loan options and pre-qualify you for a home that you can afford with your income. In the mean time work with your broker on improving your credit score. You’d be surprised how much improvement you can make in a year or so.
Teri Andrews-Murch,
Realtor®, Lyon Real Estate
