Home Financing Options for all Credit Types
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If you want a conventional loan you will need a credit score of 620 or better and a minimum of 10% down payment. The better your credit score, the better your interest rate. You will also need a debt to income ratio of somewhere between 35%-40%. If you meet these criteria you can get pre-approved and shop for any home that will appraise for the asking price. This is the best option if you can afford it and qualify for it because it will not limit you as far as the home you can buy, and you will be locking in your interest rate which is historically low as of the time of this article.
You can also try and qualify for an FHA loan, which has easier qualifying guidelines. With an FHA loan you only need 3.5% down payment and around 40% debt to income ratio. If you are a first time home buyer you can get away with up to 50% debt to income ratio. Also, your credit score can be as low as 610. There are two main setbacks with a standard FHA loan. One, the home will need to meet certain FHA living standards, which means it will be tough to buy a fixer-upper. Also, you will have extra waiting time to close because an FHA approved underwriter will have to approve the loan and they get picky some times. It's a great option if you don't have a lot of money to put down but be ready to get the paper work out.
You last option, and probably most expensive in the long run is to buy a home on contract. Basically, you will pay the seller a down payment (average is around 10% down) and you will make payments to the seller, who essentially is financing the home for you. This arrangement is normally for a set time, somewhere between 3 and 5 years on average and after that time you will get traditional financing through the bank. What this does is give you time to improve your credit and while you are paying the seller for the first several years you are building equity in the home and lowering the amount you will have to finance through the bank. Watch for the amount the seller charges in interest though, sometimes it is really high.
If you can get approved and know you can afford a home, a conventional or FHA home loan can be a great option. With rates in the 4.5% - 5.5% range and lower home selling prices, you can get a great house with almost any budget. Watch out for adjustable rate mortgages, they can get you in trouble down the road. You don’t want your payment to jump up $100 or more every six months so stick with a conventional locked in rate mortgage if you plan on staying in your home for a long time.
Just a quick note: take care of your new home. Make sure you clean the gutters and perform routine maintenance like switching furnace filters, checking smoke detector batteries, etc. A little work each month will keep your home nice and prevent a bigger, more expensive problem later. As the housing market recovers, the home you just bought for a good deal will rise in value and if you take care of it you will be building a nice asset for your future.
