Credit score needed for fha loan

Raun and Christina Swafford of Clarksville, Tennessee, were thrilled when they found out they were expecting their first child. Now that their family would be expanding, the couple felt it was time to take inventory and make some changes in their lives. They started by thinking about moving. "We realized we needed more space for the baby," says Christina. "Also, we were considering having my morn come and move in with us, and we thought owning our own land would be a wonderful thing." With that, the Swaffords packed up their townhouse and went looking for a home of their own. They purchased a three-bedroom house last April for $86,900.

With interest rates still near historic lows and the growing popularity of low down payments and "no money down" mortgage programs, more families and individuals are taking the plunge into first-time homeownership. "Buying is a viable option because it provides a tax write-off, it allows owners to build equity, and it is a sign of a stable [financial] future," says Pierre Dunagan, president of The Dunagan Group, which offers mortgages and other financial services. Dunagan says many people are still delaying building wealth through homeownership because they think they must already have the money in the bank to do it. "People assume they'll need 15% to 20% down to get their first home, which is simply not the case these days."

Fannie Mae, while not a lending institution itself, is a government-sponsored enterprise that buys loans from lenders to make mortgage financing available to more borrowers. A number of financing programs that don't require the standard 20% down payment--or any down payment at all--are available through approved Fannie Mae lenders and mortgage companies. One of them is the Flexible 100 program, which is especially popular with first-time home buyers. Borrowers need only contribute $500 toward the down payment and/or closing costs. The Flexible 97 program, which allows borrowers to put up just 3% of the cost of the home, is also available through Fannie Mae. Banks have created similar programs to help new home buyers. To obtain a list of approved Fannie Mae lenders, log on to www.fanniemaefoundation.org or call 800-7-FANNIE.

SPECIAL PROGRAMS MAKE IT EASIER

Many of the new loan products for first-time home buyers have been created specifically to make homeownership easier, says Fannie Mae spokesperson Sandy Cutts. "In addition to our Flex programs, we have the Expanded Approval/Timely Payment Rewards program for people with less than perfect credit. With this program, the homeowner makes on-time payments for two years, then after that time, their interest rate automatically lowers," she explains.

Cutts also says Fannie Mae has rolled out a new pilot product called the Payment Power program, which allows borrowers to defer two monthly payments a year--but no more than 10 over the life of the loan--in exchange for slightly higher interest rates. The loan reamortizes, meaning that the skipped payments are recalculated into the remaining payments. This program may be especially beneficial for people who hold seasonal jobs, such as teachers and construction workers who may not have an income during certain times of the year.

Dunagan says there are also 100% financing programs available for first-time home buyers but, in some cases, they have higher interest rates and higher private mortgage insurance costs. He says deciding whether having a higher interest rate is better than long-term renting is an important decision prospective home buyers will have to make. Christina Cowens thought the former was a better option when she decided to buy her first home in 2002. After moving from New York City to Minneapolis to take an administrative position that would advance her career in education, she thought, "[Why am I] helping strangers invest and live well off of my rent money and I'm not receiving any financial return or benefit for myself?"

Cowens found a dedicated real estate broker to structure a 100% financing deal through Countrywide Bank's 80/20 program, in which a home buyer can get 100% financing by taking out two mortgage loans. The first loan will equal 80% of the mortgage up to $400,000 and the second will cover the remaining 20%, up to $100,000. The combined loans cannot exceed $500,000. In order to qualify for this program, the buyer's credit score must be higher than 580. The appraisal fee is the only out-of-pocket expense Countrywide requires of the home buyer.

In Cowens's case, the seller of the house she wanted requested an earnest fee--a deposit that indicates the buyer's seriousness about purchasing the property--so she put up $3,000 of her own money to cover it. The seller did, however, pay the closing costs in the deal. Cowens bought her home with an adjustable-rate mortgage of 7.8%. At the time of this writing, she was considering refinancing her loan at a fixed-interest rate of 4.5% through Countrywide.

After researching the housing market in Long Island, New York, four years ago, Karen and Raphael Gordon knew what they wanted in their starter home. "We had been renting for a while, were preparing to start a family, and wanted to invest in real estate," says Karen. "We figured we'd be here about seven years and hoped that, by that time, the house would appreciate in value."

The Gordons stuck to their budget during their search. They looked through newspapers and visited numerous Websites and open houses but had trouble finding a home in their price range that they liked. One day, the couple was on their way back to their apartment after another frustrating open house when they passed a quaint little home in Farmingdale. "We immediately called the broker on the sign to take a look at it. It was within our budget and we both thought it had great potential, so we immediately placed an offer because homes were going so quickly," says Karen. Although the property the Gordons fancied was appraised at $239,000, the owners of the home accepted the couple's offer of $209,000. The Gordons were able to secure a Federal Housing administration loan and raise a 10% down payment.

The FHA usually has relatively low income requirements, but different states impose their own limits on how much you can actually borrow. Most FHA loans require only 3% to 5% down. One of the most popular ones for first-time home buyers is the 203B, which is used for home repairs and renovations. The amount of the loan is based on the price of the home plus its renovation costs. For example, if a home costs $200,000 and it needs $50,000 in repairs and upgrades, the amount of the loan will be based on $250,000. Many HUD property owners take advantage of the 203B loan. It's also popular with home buyers looking to refinance with past credit problems or little or no credit history.

James Browne, a home mortgage consultant with Wells Fargo Home Mortgage, says many first-time home buyers don't take the home buying process as seriously as they should. He says that homeownership education is crucial to helping potential homeowners understand the financial aspects of buying and owning a home. For example, many would-be homeowners don't save enough money for home repairs and other emergencies before they secure their home, says Browne. The Gordons were smart and got their new home thoroughly inspected prior to its sale. This was key in helping them figure out how much additional money they'd need to put into the house to really make it livable. "It is important to be prepared for catastrophic incidents [that] may take large amounts of money [to resolve]," says Browne.

Browne also emphasizes that first-time home buyers should know their credit score and debt-to-income ratio. He says a score of 680 to 740 is a good range to be in when looking to buy. "Anybody who has a credit score of 500 is in what I call an emergency room state, [which is] basically a near death position with their credit." He says prospective home buyers should obtain their credit reports about six months before deciding on a property. This gives them time to review the report, fix any problems they may discover, and then improve their debt payments to build up their overall credit rating. A credit score above 740 is considered excellent.

Browne also cautions new buyers to make certain their debtto-income ratio allows them to afford the kind of home they want. His advice is to figure out what the total monthly expenses will be in the new home before you buy it to make sure you aren't overextending yourself.

FIVE STEPS TO TAKE BEFORE BUYING A HOME

According to Sonia Fears, a Wells Fargo home mortgage consultant, there are five basic steps potential homeowners should take when preparing to buy a home.