Home Buying in Rochester>Question Details

Arimarie, Renter in Rochester, NY

Can I purchase a house with a Credit Score of $550? My credit to debt ratio is very high (75%) but in actuality I don't have much debt, just $2k.

Asked by Arimarie, Rochester, NY Sat Jul 2, 2011

I make $20K a year so my debt is only 10%, the problem is renting in NY State right now is far more expensive than owning a home. If I keep having to shell out $800 a month for rent plus utilities I will continue to go into debt. But if I can get a low priced home with a mortgage of $600 a month I will be able to pay down my debt and start saving as well. But is my credit score and debt ratio too high for lenders to risk giving me a loan. My boyfriend will also be on the loan but his credit score is around 650.

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You are welcome. I actually recommend you get your scores from http://www.myFICO.com - it's not free but you can get a very accurate Equifax score (the same identical one us mortgage lenders pull) and also your TransUnion score (which will use a slightly older scoring model than us mortgage lenders use, so it is a little off from what we get). Unfortunately the Experian score you obtained, if it was from the internet, is what we call a "FAKO" score because it is just a real rough estimate. That could be good or bad, as your Experian score is 550, so your real Experian score is different, just tough to say if your real Experian score is higher/lower than the one you obtained yourself. You may be pleasantly surprised with what your Equifax score is.

The open account from 2008, if it's reporting as paid, may not hurt your scores anymore than if it was a closed account - as actually open accounts may help what is called your AAoA (Average Age of Accounts) where the longer that is, the more it helps your score.

You seem like you are very motivated to get your credit into shape to qualify for a mortgage if it isn't already. Since you do, I recommend you visit the http://ficoforums.myfico.com and read up about "Understanding FICO® Scoring" and there is also a section about "Rebuilding Your Credit". These are actual people like me and you helping out others with their expert knowledge on how to get your credit situation back on track - you post a question and you get feedback. A great part about that website is there is a Zero Tolerance on spamming/advertising, so you won't ever feel like you'll be inundated with advice that has an "angle" on it.

As far as the financing aspect of things, FHA financing just requires a 3.5% down payment on the sales price - to help with that down payment there is a special program for purchasing homes within Rochester city limits you can find at http://www.ulr.org/home_purchase_assistance_program.php (another website with more details on the program can be found at http://www.homerochester.org/index.asp?pageId=12 ).

USDA financing is 100% financing/no down payment, however it is generally for rural areas/towns, which is why I was mentioning those areas outside of Rochester. Some people don't like living in the city, but still want to be not too far, so USDA financing is a good option for those types of people. http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do is the website to check eligible areas (your household income also has to be within certain levels, which you can also check on that website).

Going back to the Home Program (2 paragraphs) up, you may notice it mentions:

"All Homebuyers must meet a debt to income ratio of 28:41 - This means that you should not pay more that 28% of your gross income for Principal, Interest, Real Estate Taxes and Mortgage Insurance (PITI); and your total long-term debt (debt that will take more than 12 months to pay off) should not exceed more than 41% of your gross income."

The 28/41 ratios are required for that particular program, as well as are the same for the USDA loan program, approvals with the USDA program can exceed 28/41%, but usually need compensating factors, such as good credit and/or leftover "reserves" in the bank (checking, savings, retirement, etc.) after you purchase the home. FHA permits ratios of 31/43%, and even higher than that can qualify quite often without much compensating factors (up to 44.9%/56.9%).

In your situation, if your total new housing payment was $600/mo, that would only be 25.8% of your gross monthly income, which is fine, but when you add in the $475/mo car payment, then your total debt ratio is 46.3% and so you are getting to that level where some compensating factors could be needed. But this also isn't taking into consideration your boyfriends income (or his debts), so those will also need to be factored in if he'll be on the loan.

If you need further help feel free to continue to ask questions.
0 votes Thank Flag Link Sun Jul 3, 2011

Thank you for your answer. After looking into another report it seems like Experian is at 550 and TransUnion is at 612, which still isn't great but it at least isn't a failing score. There isn't anything delinquent in the last year. I have NEVER paid a credit card late, but there is still a negative item from 2008 that has been paid and is showing a zero balance but for some reason is still listed as an open account. I am considering a credit report repair service to get this removed. This would be my first ever home so I'm not sure what FHA and USDS is. If Debt to income ratio includes car payments than I pay about $475 a month out of a gross income of $2320 a month. I claim zero so my net is about $1500.
0 votes Thank Flag Link Sun Jul 3, 2011
Debt to income ratio is monthly debt payments divided by gross income. Debts are: car payments, credit card minimum payments, student loan payments, etc... they are not utilities, cell phone, insurance, etc. Also your rent isn't included if you are buying as a primary residence because you'll have the new mortgage payment in it's place instead.

A 550 score would be an issue with a lot of lenders though, as you would only have FHA, VA or USDA financing to choose from. With FHA financing and less than a 580 score, a 10% down payment is required. USDA financing you'd have to purchase outside of city limits like Spencerport, Victor or Caledona, but it is 100% financing. VA financing you need to be an eligible Veteran (a non-Veteran who isn't your spouse has some additional challenges with being on the loan though).

Credit score isn't the only item considered though, what is on your credit report is equally as important. If there are late payments or delinquent accounts in the last 12 months when you apply then that can curtail your chances of qualifying. If it's free of those items for the past 12 months then your credit could likely be good enough as it is... but I suspect with a 550 credit score there could be some late payments or delinquent accounts in the last 12 months.
0 votes Thank Flag Link Sun Jul 3, 2011
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