How Much of a Home Loan Amount Can I Qualify for with Limited and No Credit

by James Swift

People who want to buy and home with limited or no credit often give up without even looking. They continue to pay rent for year after year because they think that there cannot possibly be a way that a lending institution would be willing to give them a mortgage loan.

This may not necessarily be the case in 2018, as many lending companies have announced more flexible credit standards than we have seen in a while. It is true that soon after the mortgage meltdown of 2007 to 2009, many lending institutions tightened their lending criteria tremendously. Only those with the best credit and a substantial down payment could get loans in many cases.

Today the landscape for lending has changed quite a bit. There are more home loan options for people with limited credit, no credit and bad credit. Below we review some of the most popular options, and provide guidance on how much of a home loan amount you may be able to afford.

Home Loans Insured by the Federal Housing Administration

FHA loans frequently are the best option for people with limited or no credit. FHA loans are guaranteed by the Federal Housing Administration, so that if you fail to pay your mortgage, FHA will reimburse the lender for most of the principal that was lent. This guarantee makes it more attractive for FHA-approved lenders to extend credit to those with bad credit or no credit.

As far as home much of a home loan amount you can qualify for with an FHA loan, this will depend upon your income level and debt level. If you have too much debt compared to your income each month, FHA may have trouble qualifying you for a loan. It may help to reduce your debt ratio prior to completing a FHA loan application.

However, if you have a solid debt to income ratio, FHA may be willing to overlook your lack of credit.

Currently FHA debt to income ratios are 31% for debt related to housing. This means that your mortgage payment, taxes and insurance payment cannot exceed 31% of your gross monthly income. It is possible for some lenders to exceed that limit, but the application will need to have other signs of strength, such as a higher down payment.

For total debt, the current debt to income ratio for an FHA loan is 43%. This means that the total amount of your monthly minimum debt payments including mortgage payment cannot exceed 43% of your gross monthly income. Again, some lenders may allow you to exceed this in some circumstances.

By looking at your total amount of house related and other debt, as well as your gross monthly income, you can get an idea of how much of a home loan you can afford. FHA generally will not allow your total monthly mortgage payment and total debt payments to exceed the aforementioned ratios.

An advantage of working with FHA is that it is often willing to overlook people who have a limited credit history or even poor credit history. If you can prove on paper that you have the income to support your mortgage and other debt payments, you may be able to get a home loan. The government has also started insuring FHA solar loans, so it makes sense to consider a few simple energy efficient changes when buying a home.

Some people with limited credit history may find that they cannot get as much of a home as they would like. FHA may allow you to get a larger loan with some of these compensating factors:

• More down payment: FHA requires a minimum of a 3.5% down-payment, but if you can put down more, you may be able to get a higher DTI ratio and be able to get a bigger home loan amount.
• Good payment history: If you can show that you have had past mortgage payments that were more than the payments on the loan you now want, FHA may give you the loan.
• Savings account: If you have a lot of cash in the bank, you may be able to qualify for a higher loan amount.

USDA Home Loans

Another really good home loan option for people with limited or no credit is a USDA loan. These mortgages are guaranteed by USDA are intended for people with limited credit history and lower income who want to buy a home in a rural area.

This program is available with 100% financing and has similar flexibility as the FHA program in terms of credit, income and debt load. If you can demonstrate that you have enough income to support the mortgage payments, you may be able to get a loan through USDA.

How much you can qualify for will depend upon your income and total debt. If your debt to income level exceeds 31% and 43% as with FHA, you may need other compensating factors to get a larger home loan.

Not every home that qualifies for this program is strictly in a rural area. There are some homes that are actually near major US cities that USDA may qualify as rural. You will need to check with the USDA website to see if the homes you are considering qualify as rural under USDA guidelines.

VA Loans

If you are active military or a veteran, you may be able to qualify for a loan that is guaranteed by the VA. This loan is a fantastic option because it is available to those with limited credit histories. Most veterans and active military also may be able to get a no money down home loan with poor credit, backed by the Veterans Administration.

The VA views this program as a benefit of serving in the US military, so it is very flexible in terms of income, debt and credit history. The VA also does not change the interest rate on your loan based upon your credit history. In fact, the interest rate that you get is often below FHA loan rates, which are themselves very low.

On a VA home loan, you may borrow up to $359,650 with 100% financing if you can show that you have the income to make the payments.

To learn how much you can borrow, take a look at your debt and income. The goal standard DTI benchmark at the VA is 41%, but VA-approved lenders may go above that if they think you are worthy of the risk.

Bottom Line

There are options today for people with limited or no credit history to get a home loan. Check out the above programs and see what you can qualify for today.

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