If your score is at least 600 but less than 620 then your best option is FHA. It may be your only option.
With a 600-619 credit score you are looking at an FHA loan and may be limited to 43% debt ratio. Qualifying Debt ratio is used to determine the maximum housing payment a person can be qualified for. Take your gross monthly income $_______ and multiply it by the max debt ratio your lender says you can be qualified for ___% and then subtract your currently monthly debt from that amount to get your max housing payment. For purposes of this calculation monthly debt is defined as car payments + student loan payments + other loan payments + minimum payments due on credit cards + child support payments. Example: If a person earned $60K/year their monthly income is $5000. If their score is 619 then they probably can only be approved for about 43% of their income for housing + debt. $5000 X 43% = $2150. If this person’s debt were $650/month then their max housing payment would be $1500 ($2150-$650) but if this person had $850/month in debt then he/she would only qualify for $1300 ($2150-$850).
The underwriting of a loan where the credit score is 600-619 will require you to have some strong factors in your favor which would include things like a strong savings history, longevity on the job, having rent that is the same or higher than your new mortgage payment, having extra money available after closing, and other “compensating factors” that may contribute to your success as a home owner. In this credit score range, the underwriter will want to document a satisfactory rental history for you.
Once you get to a 620 score, more options open up! If you are purchasing in NH and your income is less than $115,500 then you can use NH Housing’s flex programs which include a VA, FHA and a RD (Rural Development) option. Your lender will help determine which one works best for you.
Most loans have to be run through AUS “automated underwriting system” (computer model). This will result in “findings” (a report that prints out after the loan has gone through the automated underwriting) which basically dictate what you can do in terms of maximum housing and debt ratios.
If your score is 600-619 the best advise is to build up your profile and score as quickly as you can. Remember, the ideal credit report has 3 – 7 open accounts reporting that are current and have a balance. The ideal is that each account has been open for 24 months (12 months to be considered a good reference). For credit cards, the balance should never exceed 30% of the credit limit. Ideally credit cards should be paid in full each month to avoid interest charges. There should be no late payments on anything in the past 24 months and if there have been late payments in the past 12 months then you just may not be approvable.
If your score is between 600 and 619 you can buy a house using FHA financing if you have a strong file.
If your score is between 600 and 619, take action to improve it! 620 is a much better score for buying a house. 680 should be your secondary goal. Things open up for home buyers when the score hits 680.