Bad Credit = Home Loan...Ever?

[MadMoney]

OK, so I have about three or four credit cards that are all in collections over the last two or three years. Probably totaling no more than $3,000.

I just got married and my wife has the same situation with credit cards listed above (maybe a few more) but also has around $30,000 in student loans (she just graduated last Summer) and we just started paying on this.

So, is it absolutely, 110% impossible to get a home loan in this situation? What if I know a guy who knows a guy?

I'm just trying to realistically assess my options.

Thanks!

[disneysteve]

So both of you have debts in collections. That means both of you probably have pretty low credit scores. That would make getting a mortgage very difficult, if not impossible, right now. Of course, you shouldn't be looking at mortgages right now so it really doesn't matter. First, you need to get your finances under control and pay off all of that debt. That will help bring up your credit score. Then you need to save up a 6-month emergency fund. Then you need to save up a 20% down payment. Hopefully, by the time all of that happens, your credit scores will have recovered enough to qualify for a mortgage with a decent rate. Good luck.

[jIM_Ohio]

What are your credit scores?

[wincrasher]

We there is what you SHOULD do, and what you HAVE to do.

You must clean up your collection items and improve your FICO.
Once your score improves, there are some parameters to get qualified for a mortgage.

You are probably a candidate for and FHA mortgage, not a conventional bank loan. So you'll need a FICO of at least 620. Some on here have said the reality is higher, but I don't know for sure - but that is what the government is publishing.

You also would need 3% down. All your remaining debt payments, including the new mortgage cannot exceeed 41% of your gross income (that includes your spouse). The mortage payment itself cannot exceed 31%. You also need tax records for 2 years and steady employment.

Steve is right in that to be prudent, you should have 20% down and 6 months EF. That's the smart path. But you can qualify without it.

So either way you are not without hope. Best thing is to start today cleaning up the mess. The sooner you start, the sooner you can reach your goal.

Good Luck!

[disneysteve]

You also would need 3% down. All your remaining debt payments, including the new mortgage cannot exceeed 41% of your gross income (that includes your spouse). The mortage payment itself cannot exceed 31%.

These criteria are way too lax and probably have a lot to do with the housing mess.

Nobody should buy a house with 3% down. I'm a firm believer in 20% but at the bare minimum, 10% if absolutely necessary.

The debt ratios are too high also. Keep mortgage to 28% and total debt to 36%. These used to be the standard numbers that all lenders used. Once they started relaxing those requirements, things started going downhill.

[wincrasher]

Steve, what you say is true and I agree. but that was not the question. they wanted to know if they were doomed forever.

I say that they could either have a short path to their goal, or a longer one. But there is a way nonetheless.

And BTW, the FHA track-record is pretty good. The whole premise is that people in the program need greater attention - and they get it.

[disneysteve]

I honestly don't know much about the FHA program. I should read up on that. I do wonder how a 3% down payment can be a good thing. Seems to me it would push people into home ownership who aren't really ready for it.

[Caoineag]

DS we did the 3.5 down with 15 year and it was extremely handy. It allowed us to use the rest of our cash to repair the home (which desperately needed repairs). Of course we had high enough scores to go conventional but at the time FHA was cheaper overall even with mortgage insurance. I can see having something against 3.5 and 30 year because it would take forever to gain any equity but 3.5 and 15 year gains equity pretty quickly. Between our paydown and our repairs, our house just valued a lot higher so now we are getting a conventional refinance(~27% equity) to lower interest and get rid of mortgage insurance.

[Caoineag]

OK, so I have about three or four credit cards that are all in collections over the last two or three years. Probably totaling no more than $3,000.

I just got married and my wife has the same situation with credit cards listed above (maybe a few more) but also has around $30,000 in student loans (she just graduated last Summer) and we just started paying on this.

So, is it absolutely, 110% impossible to get a home loan in this situation? What if I know a guy who knows a guy?

I'm just trying to realistically assess my options.

Thanks!

In about 2 years, after you have cleaned up your credit and saved some money you can probably get a loan but I suspect given what I know of the underwriters, there isn't much they could do for you now.

[disneysteve]

DS we did the 3.5 down with 15 year and it was extremely handy. It allowed us to use the rest of our cash to repair the home (which desperately needed repairs). Of course we had high enough scores to go conventional but at the time FHA was cheaper overall even with mortgage insurance. I can see having something against 3.5 and 30 year because it would take forever to gain any equity but 3.5 and 15 year gains equity pretty quickly. Between our paydown and our repairs, our house just valued a lot higher so now we are getting a conventional refinance(~27% equity) to lower interest and get rid of mortgage insurance.

Thanks for that. I guess if you can put down 3% and still have the payments be within reason for your income, it can work out fine.

[BTC]

FHA loan requirements will make it harder to get mortgage - Jan. 19, 2010

[Mike75]

OK, so I have about three or four credit cards that are all in collections over the last two or three years. Probably totaling no more than $3,000.

I just got married and my wife has the same situation with credit cards listed above (maybe a few more) but also has around $30,000 in student loans (she just graduated last Summer) and we just started paying on this.

So, is it absolutely, 110% impossible to get a home loan in this situation? What if I know a guy who knows a guy?

I'm just trying to realistically assess my options.

Thanks!

It will be very very difficult. Most lending companies don't give loans to people with low credit ratings. Plus, I would suggest that you should concentrate on repaying your present loans instead of taking another huge loan.

[swanson719]

I agree with just about everyone else - buying a house right now isn't wise given your finances, and you would be lucky to get a mortgage. Even with an FHA, let's suppose you have the 3% down. How are you going to furnish or maintain a house? How are you going to pay for inspections, appraisals, etc. that aren't included in closing? Those can easily top $1,000 if you look at a house that fails inspection, which isn't at all rare. What happens if during your first year of ownership you have your AC unit go out? Happened to us.

These are the things DisneySteve is talking about with the 20% down and a minimum of a 6 month EF with no other outstanding debt. Also, when the bank tells you your mortgage amount, remember that doesn't include homeowners insurance or property taxes. You also have PMI if you don't put 20% down.

As far as buying a house w/o 20% down and an EF, etc, it can be done. We bought a house through the VA with 0% down on a 6.75% 30 year fixed, still had a car note, and no EF. Definitely not the smart way to do it. We went a good six months of being month to month because we blew all we had in savings just to buy the house. We refinanced to a 5% 30 year fixed after 6 months in the house, though I wish we had gone to a 15 year.

By the time we get our EF up to 9 months of expenses including the mortgage, we will have been in the house for a little over 2 years. We bought in September 2008. I was 21, DW 24, and we didn't look into it too much. Applied for the loan with the VA and FHA, got approved by both, and bought the house with the VA because it was cheaper. Took the first time home-buyers credit, which now costs us $500 a year extra on taxes. Bad idea. My credit score at the time was 630ish and DW's was a little over 700.

Trying to buy a house with $6,000 in collections and a $30,000 student loan sounds like a bad judgment in my opinion. If you couldn't pay bills resulting in $6,000 in collections how do you intend to pay a mortgage?

Get the bills paid off, get the cars paid off, get 20% down saved up, figure out what your mortgage will be with insurance and taxes, get at least 6 months of expenses with a mortgage saved up, and then go buy a house. I would advise getting a good chunk of the student loans paid off too.

I'm not saying this will happen to you, but I see a lot of women get a degree, go work for a few years to be able to buy a house. They don't get the student loans paid off during those few years, then when they have a house, all of a sudden they go "I'm 26, have a house, a husband, and I want a baby." My wife is doing this to me right now, though college and student loans weren't involved. So what was the point in her going to college and getting student loans if she is going to want a baby before the college paid for itself or the student loans are paid off? Then you will have the additional expenses of a baby, a wife who is probably not working for at least 5 years, and still be paying student loans, all on one income instead of two. You see how difficult that will be to budget for? Not to mention trying to save for retirement.

All of this is why those on here who have life experience and have lived through stuff like that try to tell us younger people the right way to do things. It's advice worth taking, even if it's not what you want to hear.

[irmanator]

I honestly don't know much about the FHA program. I should read up on that. I do wonder how a 3% down payment can be a good thing. Seems to me it would push people into home ownership who aren't really ready for it.

I think it depends on the people involved I got my mortgage in 2005 with 0 down. BUT I refused to let the realtor push me into a house i couldn't afford. I didnt even talk to a realtor until I went on the mls websit and found a house I was comfortable with. THEN I found a realtor to do the paper work and let me in. My house is cheaper than the rent i was paying and cheaper than any rent will be so I would be hard pressed to default.

[disneysteve]

I think it depends on the people involved I got my mortgage in 2005 with 0 down. BUT I refused to let the realtor push me into a house i couldn't afford. I didnt even talk to a realtor until I went on the mls websit and found a house I was comfortable with. THEN I found a realtor to do the paper work and let me in. My house is cheaper than the rent i was paying and cheaper than any rent will be so I would be hard pressed to default.

Makes sense. As we all know, even a 20% down payment doesn't guarantee that you can afford the home. We borrowed a lot less than the mortgage company approved us for. We could have been stretched really thin but we knew that we couldn't afford that.

I know that far too many people don't run the numbers themselves, though. If they're approved for a certain amount, they assume that means that's what they can afford to spend.