Bad credit and living on disability: Is a new home out of reach?
By Kim McGrigg
Dear Credit Care,
My credit scores stink -- around 530 or 540. But I'm currently living on federal disability of $1,716 per month. That's an automatic payment every month until I die. I'm 50 years old, and I'd like to buy a three-bedroom house in Las Vegas for $80,000. Is it impossible for me to get a loan with my guaranteed disability income? -- Dan
Your chances of qualifying for an affordable mortgage will depend on several factors. On the plus side, you have a stable source of income. On the negative side, you have obviously had some prior credit issues with a credit score of 530. Your less-than-stellar credit score may affect your ability to qualify for a mortgage loan, especially if you have unpaid accounts reflected on your credit reports. Most mortgage underwriting guidelines require that all unpaid accounts be paid, particularly if you owe the federal government for taxes or student loans or owe back child support.
So, you will first need to review your credit reports to understand what potential mortgage lenders will be viewing. You can get free copies of your reports once each year from AnnualCreditReport.com. In addition to your credit reports, mortgage lenders may view any specialty consumer reporting bureau reports, including rental history.
Generally speaking, to qualify for a mortgage, your debt-to-income ratio cannot exceed 40 percent of your gross income. Debts would include: your mortgage payment, plus escrowed monthly insurance and taxes; and all revolving (credit cards) and installment (auto loan, student loan, etc.) accounts' minimum monthly payments. For purposes of loan qualification, your monthly disability payment would be grossed to approximately $1,736 per month. Based solely on your disability income, to qualify for a mortgage you would need to have total debt payments of $694.40 or less.
As of Nov. 3, 2011, the monthly payment on a 15-year fixed rate mortgage on an $80,000 home in Las Vegas would be $572 to $720 depending on the interest rate of your loan. The monthly payment on a 30-year fixed rate mortgage would range from $360 to $533. So, you would need to add the approximate monthly costs for insurance and taxes to these monthly mortgage payment figures plus any additional minimum monthly payments on other credit accounts you have to determine if you would meet the debt-to-income ratio requirements for a loan. You may also need to prepare for the possibility that you may need to make at least a 20 percent down payment to qualify for a loan, which would reduce the mortgage payments substantially.
The next big hurdle for you will be qualifying for a loan with your low credit score. Current FHA credit score requirements are 580 or higher to receive maximum financing, while scores of 500 to 579 are eligible for financing of 90 percent of the home price. What will help your chances of qualifying for a mortgage and help improve your credit score is to pay all outstanding credit balances on charged-off or collection accounts and add at least one year of on-time and paid-as-agreed payments for all current credit accounts.
You can learn more about the requirements and loan application process for an FHA loan on the FHA's website. I would also recommend that you visit with a loan officer at your current bank to get an idea of what you could expect from a mortgage loan application with them.
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Published: November 7, 2011
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