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Dear credible money coach,
My husband and I are looking to buy a house that we can afford. We both have SSI disability and our credit scores are low – mine is in the 500s. Do both of our credit scores have to be 620 to get a loan? Also, I don’t know who to talk to about getting a loan. – Debbie
Thanks for your great question, Debbie! Getting your credit in good shape and knowing how much home you can afford are the first steps for you and your husband to become a homeowner.
Low credit scores don’t prevent you from getting a mortgage if you qualify for a federally guaranteed loan. Ask potential lenders if you qualify for any of the following mortgage programs.
Many people with low credit scores or low incomes may benefit from a FHA loan. This is the Federal Housing Administration, which is part of the US Department of Housing and Urban Development. The FHA insures these loans, which means that they will pay it off if a borrower defaults. Insurance makes it attractive for private lenders to grant mortgages to those who may not qualify for a conventional mortgage.
Depending on how much you can invest in a home, you may be eligible for an FHA loan even with a low credit score. FHA borrowers with scores of 580 or higher can deposit as little as 3.5%. If your score is 500-579, you must pay at least 10% deposit.
An FHA loan comes with lower closing costs than a conventional loan. Be aware, however, that the amount you can borrow is limited depending on where you live. You can find the limits of your area on the HUDs FHA Mortgage Limits page. And you can find an FHA lender through HUD Lender List Search Page.
If you or your spouse are a veteran or active duty military, or want a home in a rural area, you may be eligible for the following mortgage programs, even with low credit scores.
The US Department of Agriculture funds direct loans to help very low-income Americans buy homes in certain rural areas. And the USDA guarantees loans offered by other lenders to moderate-income buyers.
USDA mortgages don’t require you to pay down payment, and there is no minimum credit score required. Find out if you qualify for a USDA loan at USDA website.
Finally, if you or your spouse are a veteran or active duty military, you may be eligible for a VA loan. The private lenders provide the loans, and the US Department of Veterans Affairs guarantees part of it. VA loans, like USDA loans, do not require you to repay money. You can find out more about the AV website.
All that said …
It may seem unfair that a low credit score limits your ability to get a home loan. But it can be a sign to lenders that you are in financial difficulty and would not be able to pay them back. If your credit scores are low because you are recovering from financial difficulties, this might not be the best time to buy a home. Instead, focus on getting your finances back on track and build your credit.
Even the best mortgage rate and the best repayment terms represent a significant financial commitment. To understand how a mortgage would affect your budget and financial future, use a mortgage payment calculator to help calculate the numbers.
Need Credible® answers for a money related question? Email our credible money coaches at [email protected]. A Money Coach could answer your question in a future column.
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About the Author:
Laura Adams is an expert in personal finance and small business, award-winning author and host of Silver girl, a top rated weekly audio podcast and blog. She is frequently cited in the national media and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her work as a speaker, spokesperson and advocate. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.