Teachers with bad credit still have many home loan options. While a high credit score speaks volumes, it’s not the only way to get a home loan. Teachers are eligible for the same loan programsborrowers in any other profession can get. In addition, though teachers may be eligible for some ‘special programs’ that make homeownership more affordable.
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FHA Loans are a Good Fit
Oftentimes teachers with bad credit turn to FHA loans. As long as you have at least a 580 credit score and 3.5% to put down on a home, you may qualify. Teachers can get a home with little money down and as much as a 41% total debt ratio.
FHA loans do charge mortgage insurance for the life of the loan, so keep that in mind. You do have the option to refinance at any point, though. Once you improve your credit score, and owe less than 80% of the home’s value, you can refinance into a conventional loan and ditch the insurance.
If you are a teacher with a credit score between 500 and 579, you may still qualify for an FHA loan. However, you’ll need at least a 10% down payment. You’ll also go through what’s called manual underwriting. Rather than a computer underwriting your loan, a person will do it. That person will go through your file with a fine-toothed comb, so to speak.
With a 500 – 579 credit score, you may need compensating factors. These qualifying factors help make up for the risky credit score. A few examples include:
- Low debt ratio – If you only have a few debts, you leave more money available to make your mortgage payment. This lowers your risk of default, which lenders like to see, especially with a low credit score.
- High down payment – Even though FHA loans only require a 3.5% down payment, you can make a larger down payment. Investing your own money shows your desire to be a homeowner and make your payments on time. If you don’t, you risk foreclosure and losing your entire investment.
- Stable employment – Lenders like reliability and consistency. If you change jobs often, they won’t have that feeling of consistency. If you stay at the same job for many years, though, you show lenders that you are reliable, which lowers your risk of default.
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USDA Loans are Good for Rural Areas
The USDA loan is another government-backed program. You must live in a rural area in order to use this program, though. Your total household income also must not exceed 115% of the average income for the area. You can see if you are eligible here.
The USDA does have slightly higher credit score requirements, though. You need a 640 credit score. But, you don’t need a down payment. You can borrow up to 100% of the home’s value. While the credit score requirements are higher, they aren’t as high as conventional lenders require and you could save money without a down payment requirement.
USDA loans are for modest homes. They do charge mortgage insurance, but it’s only 0.35% of the loan amount each year. On a $150,000 loan, you would pay $43 per month in insurance.
Subprime Loans
Finally, you may want to explore your subprime options. These loans come from smaller lenders in your area that keep the loans on their own books. Subprime lenders create their own guidelines and rules. They can accept low credit scores, high debt ratios, and low down payments. Each lender has their own programs, so shop around to find the one that suits you.
Read the fine print when looking at subprime loans. Make sure you know the interest rate, term, closing costs, and any other terms of the loan. Is the rate fixed or is it adjustable? Will you pay points to get the loan? Is there a prepayment penalty?
The Teacher Next Door Program
HUD also offers the Teacher Next Door Program. It’s an extension of the FHA loan, but it comes with great rewards. Teachers and other service-oriented individuals, such as police officers and firefighters are eligible for this program.
HUD designates specific properties in the area that qualify for the program. They are foreclosed homes in an area that could use a positive influence to boost the economy. If you win the ‘lottery’ to buy the home, you only need $100 down on it. You must have FHA financing and agree to live in the home for at least 3 years. If you do, HUD writes off half of the cost of the home after three years.
This means after three years you could sell the home for its value and make a 50% profit or more. Because you only need FHA financing to buy the home, even teachers with bad credit may qualify.
Teachers with bad credit have many options for home loans. The key is to shop around and see what options are available to you. Get offers from at least three lenders to see which lender/loan program will give you the best deal.