Self discipline can pay off, even if credit score doesn't
Jessica White/DC Columnist
Issue date: 9/21/08 Section: Business
|
A few years ago, I became ill and lost my job as a result. Money was tight until I was able to recover and get another job, and as you can probably guess I had some medical bills and other bills that went into collection because I simply had no money. For the last couple of years, I have been trying to improve my credit score and save some money for a down payment. I have skipped movies, dinners out, happy hours, trips, new clothes - you name it - and saved almost $10,000.
The problem is that my credit score is still low. Last time I checked it was around 580. I am getting discouraged. Do you think I can buy something any time soon?
Thanks!
Malika F.
Dear Malika,
I am impressed by your discipline. It is hard to deny immediate pleasures - movies, dining, clothes - in order to save money for a distant purchase. Do not be discouraged about your credit score. All that work on your credit score will pay off one day. But, I do not think you will have to wait to buy a home. I think you can buy a property now, with a loan guaranteed by the Federal Housing Administration (FHA).
FHA loans are gaining traction in today's market, thanks to the demise of many subprime lenders and the updating of FHA's guidelines that remove some unnecessary hoops and hurdles for the buyer. While FHA loans are not meant to replace the subprime market, borrowers with a blemished credit history are more likely to get a loan with a great interest rate.
FHA loans are full documentation loans that generally require a small down payment of 3%. The borrower will have upfront mortgage insurance, meaning that the mortgage insurance amount is rolled into the loan amount, and a smaller monthly mortgage insurance payment than with a traditional loan with mortgage insurance. The debt-to-income ratio for an FHA mortgage is 31% - meaning you can spend 31% of your gross income on your loan, and your total debt-to-income ratio (DTI) cannot exceed 43%. (To calculate you total DTI, tally of all your monthly debts that are on your credit report - car payment, student loans, credit card debt, etc - and divide that by your monthly income. Please know that these ratios are flexible and can be increased for borrowers with high credit scores.)
Be the first to comment on this story