There are many challenges that come along with being a single mother. Not only do you have to manage all of the parenting duties by yourself, but you also only have one income to rely on each month. If you pair that with the fact that you have bad credit, you have the perfect recipe to make it difficult to get a home loan.
Luckily, you do have options. Don’t give up just yet!
FHA loans used to be known as the first-time homebuyers loan, so many people overlook them as a viable option today. Truth be told, they are not just for first-time homebuyers. They are for anyone that qualifies. The good news is that they don’t require good credit, low debt ratio, or a high down payment. It sounds like the perfect loan for single mothers, right?
In order to qualify for the FHA loan, all you need is:
- 580 credit score
- 31% front-end (housing) ratio
- 43% back-end (total) debt ratio
- 5% to put down on the home or a gift in the equivalent
- Money to pay for closing costs (or a gift in the equivalent)
- Stable income
- Stable employment
This may sound like a lot, but it’s nothing compared to other loan programs, like the conventional loan. The FHA loan is about as flexible as they come today. A 580 credit score is considered ‘bad credit,’ but the FHA allows it. Combining that with a higher debt ratio and high LTV and you have the recipe for default, but the FHA doesn’t see it that way. In fact, they guarantee the loans that FHA lenders write if you meet these guidelines, making it less risky for lenders to fund the loans.
You may find some lenders that require stricter requirements than this, but don’t worry. All you have to do is shop around and look for another lender that will accept your situation.
If you cannot qualify for the FHA loan because you don’t have the money to put down on the home and you don’t have the resources to secure gift funds, you can try the USDA program. This program does require a slightly higher credit score of 640, but they don’t require a down payment. You can borrow 100% of the price of the home as long as it’s worth as much as the purchase price.
The USDA loan works much the same way as the FHA loan – the USDA guarantees the loan for the lender, making it possible for them to fund a risky loan. But, the USDA has some unique guidelines regarding who may be eligible for the loan.
First, in order to qualify for the program, you must buy a home in a rural area. This means rural according to the USDA, so it might differ from your definition of rural. It doesn’t mean living out in the middle of cornfields, by any means. It just means living outside of the city limits in an area with low population according to the latest census.
You also must not make too much money in order to qualify. Single mothers usually make good candidates for this loan because they are often low to middle-income borrowers. The USDA will calculate the total of all of your household income (the total from all adults). This total must be less than 115% of the average income for the area in order to qualify. If it is, you can secure 100% financing for a home in a rural area.
Single mothers with bad credit often seem like they are in a bad position when it comes to buying a home, but there are options. Because FHA loans allow the use of gift funds, both the FHA and USDA loans are viable options with very little cash out of your own pocket. Talk with several lenders and see what options you have available to you so that you can realize the dream of owning a home too.