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February 16, 2013 1:10 PM   Subscribe

Should I attempt to buy a home with my poor credit (if it's even possible) or work on rehabing my abysmal credit?

I'm looking to buy a home. Here are some details I think might help me (and you!) unpack my question:

-- My credit score is around 590.
-- I live in a very rural area with tons of foreclosures.
-- I have about $18000 in student loan debt, currently in deferment.
-- I have about $2300 in other debt (between a hospital bill and a debt to a college. I can afford, with current savings, to pay both these off but I was keeping that money close as a potential down payment.)
-- I had applied for a mortgage on a foreclosed house. I was turned down because the lender wanted a credit score of 620 and the house was about $80000.
-- There is another house, of which I know the full history and looooove, that is also a foreclosure and is listed for $34900.
-- I have rented our current house for 5 years and have excellent rental history.
-- I am employed and have been steadily for 16 years.
-- We also have guaranteed income of over $700 a month.
-- I am a single parent, never married (if that matters).

That said, I'd like to buy a house if I can. The lender through which I had previously applied does FHA loans but I was still rejected for the house that was $80000. Would it make a difference if I asked for a loan for half that and was able to put up a 10% down payment or is it likely that the bank through which I applied is not able to loosen that credit score requirement at all? Is it even remotely possible that I can buy a house with my credit score or should I just give up on that and be happy to rent? From what I've read, FHA loans require a credit score above 500 but how do I find a lender that will loosen their requirements when the one I spoke to won't?

If I can't buy, what steps do I need to take to rehab my credit? As I mentioned, I have about $5000 in savings and can pay off some debt but I was advised that in addition to that I should also attempt to get a credit card with a low limit and pay that down monthly. Frankly, I'm highly opposed to that (I haven't had a credit card since I was in college 10 years ago and I really hated that damn thing) but I guess I'll do it if it'll help.

Any thoughts would be appreciated. We had originally planned to buy the current house we're in as an owner financing deal but it turns out my landlord is slightly crazy and incredibly greedy and was attempting to sell it despite the fact that it's locked up tight in a trust. I'd love to stay here and don't mind to rent this particular house (there are so many pluses to this specific house for us) but I have a feeling that if she can't sell it she's going to raise our rent astronomically high and it would be so much smarter for me to buy.

Any thoughts would be great...
posted by youandiandaflame to Work & Money (12 answers total) 4 users marked this as a favorite
We just purchased a home with an FHA mortgage. That being said, I think your score is a little too low, with too little cash to do it right now.

I would forget about the credit card right now. We did it for my husband and it was a waste of time and a giant headache for me.

Can you get on an income based repayment plan with your student loans? A payment history with those would be great. Also - are you paying on the other debt? Those are probably looking worse on your credit report than anything.

The lender doesn't care about your great rental history. If you had a bunch of evictions and judgments on your record, that would be one thing, but there's no way to quantify your awesome history of paying rent on time to a lender.

Your income is really low. Is it just you and a child?
posted by checkitnice at 1:32 PM on February 16, 2013 [1 favorite]

I think the first thing to sort out is why your credit score is what it is. Are you sure that it's fully accurate? Get your free credit report and make sure that everything is accurate before proceeding. Assuming it is, you need to fix your debt/income ratio which means making regular payments on your various debts.

Second, lots of places won't do mortgages under $50,000. Does the place you're looking at even qualify for a mortgage? You'll need to make some phone calls to straighten this out.

One thing to consider is that even if you can get a mortgage, the rate will likely be quite unfavorable. You can probably raise your credit score 50-100 points in a year, which should put you into "good" credit territory and you will get many more financing options and better rates as a result.
posted by zug at 1:34 PM on February 16, 2013 [1 favorite]

Oh, whoops! My income is quite a bit more than just $700 -- I only mentioned that figure because I thought a *guaranteed* income of $700 at least would be a plus. There are only two of us in the home but I do, in fact, make more than just $700 / month.
posted by youandiandaflame at 1:35 PM on February 16, 2013

The deferment (and existence) of your student loan couldn't be helping. Usually they are deferred when you just don't make enough money to make payments -- so, maybe low income is also part of the problem.
posted by Houstonian at 2:28 PM on February 16, 2013

If it were me, I'd work on the credit score, rent a comfy place, pay down the student loan, sock some money away in savings, and forego the dubious pleasures of home ownership for a while. If you buy a home, you'll be stretching yourself very thin especially because your cash outflow will not stop with the mortgage. There's upkeep, insurance... and so on. I have owned two homes and I am not at all interested in owning another.
posted by Guy_Inamonkeysuit at 3:07 PM on February 16, 2013 [2 favorites]

Have you spoken to a mortgage broker? Ours helped us go through our credit reports, figure out which dings were fixable and how to fix them, then we applied for a loan. I don't think you have enough information to decide how to do this until you speak with a broker.
posted by amanda at 3:31 PM on February 16, 2013

You cannot afford a house right now. Pay off the debt and sock away away at least 6 months worth of living expenses, a nice 20% downpayment, and a good amount of money for whatever fixes, cosmetic or otherwise, you will surely discover once you own the house.
I love my house, but I think you are WAY overestimating your ability to deal with one right now.
posted by florencetnoa at 3:33 PM on February 16, 2013 [3 favorites]

Should have been more clear: I'm not really looking for thoughts on my financial situation in regards to whether or not I can actually pay for a home and it's upkeep and expenses (please trust that I have that figured out and taken care of) but instead, I'm looking for specific answers from anyone who has had an FHA loan and understands it better than I do or who has specific advice (forums, books, etc,) on rehabing credit. Thanks for all the advice thus far, though!
posted by youandiandaflame at 3:54 PM on February 16, 2013

Agree with the comment above that you need to look at why your score is so low. A credit score in that range tends to indicate a serious credit event in the past, such as bankruptcy or foreclosure. There's not too much you can do to "rehab" something like that; you mostly are just going to have to let it age out. Establishing some positive history will compensate a little. I think you are wise not to get a new credit card; starting to pay the student loans is a much better strategy (and since you'll presumably be paying them when you are a home owner, might as well make sure now that you can do it).

You should know that FHA credit score guidelines are about to get tighter: with a score below 620, if your debt to income ratio is over 43%, your lender will have to manually underwrite that loan, and very few lenders are willing to do that these days.

I see you are comfortable with financials, so perhaps this isn't useful, but... my general home-buying prep advice: use some mortgage calculators to figure out the payment amount on a home at today's rates in your target price range. Be sure to take into account the MIP (it is steep on an FHA loan) and taxes and insurance, and then tack on enough for estimated home repairs (1-3% of the home's purchase price annually). Determine the difference between that amount and what you are paying now in rent. Put that amount in a savings account every month for at least 12 months (even better, since you need the time for your credit score to recover, for 24 months). If you can do that--while making your student loan payments--without ever dipping into that account for any reason, by the time your score tops 620, you will have demonstrated that you can handle the new payment. This will make lenders much happier with a score in that range. Bonus: you'll also have a nice down payment tucked aside.

Bottom line: there really is no quick fix to credit repair. It takes time-- so use that time to your advantage. Rather than credit rehab, I would look more generally for help with homebuyer prep. A good homeowner counseling program will look both at your credit and your finances and help you prepare. Look for an agency in your area on HUD's website (hud.gov). Good luck!
posted by tinymojo at 4:18 PM on February 16, 2013 [4 favorites]

Hang on. The way I read this is you now want to get a house that is $35,000. Did you type that right? A $35,000 home with a 30 year loan, even with your poor credit, puts your monthly mortgage payment at around $200. You can't rent a closet for that. If you can actually pull that off and you're comfortable with the house, I don't see how it couldn't be better than renting. Financial responsibility also includes cash flow - which would probably increase fairly significantly. If you said you wanted a loan for anything other than a home, I would say no - not even a $500 loan. But, a home is always a different story. Did you really mean $35,000? I know people who paid more than 35 grand for their car!

Filed under "Special Circumstances".....

Good luck!
posted by Gerard Sorme at 6:28 PM on February 16, 2013 [1 favorite]

Although it's counterintuitive, it's hard to get a small mortgage. It's just not worth it to most banks to underwrite a loan that won't bring in much interest.
posted by payoto at 8:24 PM on February 16, 2013 [1 favorite]

@Gerard Sorme, the critical detail is this:

-- I live in a very rural area with tons of foreclosures.

Heck, in my mom's fairly comfortable suburb, attached to a major metro area, foreclosures are going for 70-80K. Five hours south of us, 30-50K for a foreclosure is not at all unheard-of.
posted by like_a_friend at 4:13 PM on February 17, 2013 [1 favorite]

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