Buying your first home with poor credit

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​“YOU DON’T NEED GOOD CREDIT TO BUY A HOUSE!!!"
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“BUY YOUR FIRST HOME WITH LOW CREDIT!!!"

Sure, but it’s not that simple...
A lot of people have asked about FHA loans when looking to buy a home. Although at first glance it might seem to make the most sense, especially if you don’t have good credit and cash to put down, you should be aware of what it means and weigh out the pros and cons for yourself.

Should I get an “FHA” loan to buy a house if I have low credit?
Well, first off, what is an FHA loan?... A Federal Housing Administration (FHA) loan is a mortgage that is backed up by mortgage insurance and makes it easier for people with less-than-pristine finances to buy a home. The main advantages of an FHA loan are:

• Down payment - FHA loans may allow you to put down as low as 3.5%. For people who don’t have a lot of cash on hand, that’s great news! It means you won’t have to put down 7%, 10%, 13%... you get the idea. 
• Credit Score - With an FHA loan, most people can get approved for a home with a credit score as low as 580! Woah…
• Home Improvement - “FHA 203k” loans allow you to fund home improvement projects and buy a home at the same time!

THIS ALL SOUNDS PHENOMENAL!

​Soo… what's the catch?
Well here’s the thing; low credit and low down payment is a red flag that you might not be financially sound just yet to buy a home in the first place. In reality, buying a home, no matter how great the deal is, with low credit and little cash only adds more debt to your name. You would still have the matter of fixing your credit and finances.

Not to mention:

• Insurance - FHA loans come with two types of insurance. (1) First, anything you put down less than 20% requires upfront mortgage insurance. There’s an upfront charge of 1.75% that may be wrapped into the loan balance.The more you borrow, the more interest you pay. This means you’ll be paying more than 1.75% unless you write a check at closing. A bigger loan also means bigger monthly payments. (2) Second, you’ll be paying ongoing monthly insurance. That cost is usually between 0.80% - 1.05%, although it can be lower with a 15-year loan term. Unlike private mortgage insurance, which can be cancelled once you reach above 20% equity in your home, FHA premiums are paid throughout the life of the loan.
• Term Choices - With an FHA loan, you’re limited to what kind of term you can choose. For most people, a standard 15-year or 30-year fixed loan is a decent choice either way. However, with these 2 options, you don’t have much choice in finding a good fit if an interest-only mortgage or adjustable-rate mortgage might be a better option for you. You don’t have enough options to strategically choose what’s best for your finances. Don’t just go with what gets you a low monthly payment. Think it through.
• Property Limitations - For homes that are move-in ready, and FHA loan might be OK. FHA loans require certain standards to be met, for example, basic health and safety. This makes it impossible to be approved for a fixer-upper or major bargain that otherwise would have been a better option for you.
• Qualifying - FHA loans don’t always get approved. In some cases, you can get away with an even lower score ONLY if you’re willing to put more money down…
• Seller Hesitation - Sellers like to know about potential buyers, and an FHA loan doesn’t exactly scream out “I’m super financially stable!”... Even more, they might fear that the FHA loan requirements might slow down or even ruin the deal whole.
• CREDIT - If you thought your credit-worthiness was bad before, what will it look like now? Your debt-to-income ratio plays a big role when getting approved by lenders. If you had issues getting approved for anything before, having more debt will only decrease the chances of you getting approved for anything moving forward (car, credit card, etc). By acquiring more debt on top of your already weak foundation, you’ve now made it harder for lenders to trust you with anything else.  

So what should I do?
We’re not telling you to avoid FHA loans like the plague. On the contrary, we encourage you to learn more about it. Read more and ask a lot of questions. Find an FHA lender and inquire about getting more information. 

Here’s what we ARE saying; Ideally, having better finances and better credit will give you options. Find a way to improve your credit score and alleviate your monthly expenses to save and afford a bigger down payment. This will allow you more freedom when you truly are READY to buy.

Call 1(888) 460-9440 or email us at info@masscreditrelief.com to find out more about FHA loans and how we can help you improve your credit to prepare for buying a home. Contact us and take advantage of our knowledge and experience. Mass Credit Relief will help you get into the right position to win!

Sources:
The Balance