The short answer is: You don't. But let's explore the question because there are various implications involved.
A measure of one's credit worthiness includes the amount of debt they hold as compared to their gross earnings, timely payments, number or credit lines (how many credit cards and loans you have outstanding), and if you pay on time.
What is bad credit? Lenders look at two key factors: Your over all credit debt ratio, that is the amount of money you owe as compared to your income. There are front-end ratios and back-end ratios. A front-end ratio is you monthly housing expenses divided by your monthly gross income. A back-end ratio includes the front-end total monthly expense plus your monthly mortgage, property tax and insurance (PITI). FHA guidelines state that the max front end ratio is 31% and the back is 43%.
So what this means is if you earn $6,400 gross monthly and your expenses are $1,000 your
front end ratio is:
$1,000 / $4,400 = 29% Front End Ratio
The back end ratio is your housing expense from the front end plus your PITI, say it is $1,700:
$1,000 + $1,700 = $2,700 / $6,400 = 42% (good, but sometimes you can get an exception if you are a few percentage points over).
Now, what if you are married and your spouse has "bad" credit while yours glitters like diamonds? Sorry, FHA guidelines consider the credit history of both spouses even if the "bad" credit spouse will not be on the loan or title.
A stable employment history in the same industry for at least 24 consecutive months is also required of the borrower.
So unlike the market of just over two years ago, it is not possible today to obtain a loan with bad credit.
Answer Submitted on Wed, Dec 31 2008
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