You haven't said whether you are coming in with any cash. So I am going to respond under the assumption that your purchase amount will also be $125K.
Looking at some of the responses, you have a variety of options. I would most agree that you want to focus on builidng your credit history. It may take some time, but you will fare better, have more options, and be more competitive with a better credit history - it will be well worth the wait.
In addition, the market is taking another turn in the next 12 months. New construction will assist in increasing inventory and reducing prices - making home buying more affordable than ever. Interest rates are still at their lowest even wih the recent increases.
To put it in better perspective for you, in 1981 the average home price was $82,500 with a 16.63% interest rate equaling a mortgage payment of $1,147/mo. In 2011, the average home price was $242,300 at 4% interest and a monthly mortgage payment of $1,093. $1,147 in 1981 is equal to $2,838 today.
So what am I saying? Take the time to position yourself to be in the drivers seat of your home purchase. If you go in as a desperate buyer where your lender has to "fix" a few things, and the file is touch and go (and very stressful for you), you will end up with a higher interest rate, and you miss the opportunity to learn to be a good steward of your finances before walking into the largest purchase you might ever make in your life. Moving too soon, you could also be setting yourself up to default on your loan in the future. Take the time to be a stronger buyer - history shows the market gets better with time.
Keisha Mathews, REALTORÂ®
CDPEÂ®, HRCÂ®, HAFAÂ® Certified
SAR Masters Club Member 2012
SAR Masters Club Steering Committee
Mathews & Co. Realty Group
@ Century 21 Landmark Network
(916) 370-1803 cell