Despite a white-hot housing market, securing a home loan is not impossible even for people with currently less-than-stellar credit. Armed with the information below and a willingness to make some positive changes, there’s a definite chance you can stop being a renter and enjoy earning some equity.
Home loan approvals are determined based largely on your credit score, your debt-to-income ratio, and the loan-to-value (LTV) ratio of the home you’d like to buy.
So let’s take a look at some of your options.
1) Government-backed Loans
FHA and VA loan programs are much more forgiving of poor credit ratings than big banks, and their rates are just as good and occasionally even lower.
Additionally, FHA loans only require a 3.5% down payment, and the VA offers 0%-down home loans.
There are some downsides to these programs, however, such as:
- Strict limits on how much they’ll loan. Which means you’ll likely be sticking with “starter homes” until your credit is stronger.
- FHA loans require mortgage insurance—VA loans do not—which will either add to your closing costs or your mortgage payments, depending on how you want to pay it off.
Additionally, FHA mortgage insurance is “life-of-the-loan” instead of until you’ve paid off 20% of the value of the home with a conventional loan.
If your credit is poor, but you have the ability to offer a large down payment, your LTV will improve and with it your appeal to lenders.
Know Your Credit to Know Your Choices
If a credit report reads like so much Greek to you find someone—a friend, tutor, or lending specialist—to help you understand what’s in your file.
Armed with this knowledge, you’ll then know what you can afford, and get an understanding of how much you’re likely to pay in fees and your interest rate. With this, you can then decide what steps to take to improve your credit and your chances to qualify for the best possible loan.
You’ll want to allow at least three months—though it might be more—between when you start looking for a home and when you actually start applying. This will allow you to time to make positive changes.
If it’s at all possible, you want to get your score above 700. If that’s too far, then shoot for at least above 620. Below this, your options really start to narrow.
Steps to Take to Rebuild Your Credit
1) Check Your Credit Report for Any Errors
Get a copy of your yearly free credit report from TransUnion, Experian, and Equifax. One or two false reports of late payments or open credit lines that you closed years ago could knock as much as 25 points off your score. It’s estimated nearly a fourth of all reports have some sort of error on them.
2) Start Paying on Time
Your payment history is over a third of your score. The sooner you start paying on time, the longer you’ll have the kind of payment history that lenders prefer.
3) Reduce Your Debt Load
It stands to reason that the more you owe, the more you have to pay every month which reduces your available income. Pay down as much of your debt—credit cards, student loans, back taxes, etc.—as possible since this factors into about 30 percent of your score.
4) Don’t Take on Any New Credit
New lines of credit result in a slight dip in your credit score, and opening one around the time you’re looking for a home loan may give lenders pause.
5) Don’t Close Any Paid-off Cards
This can also lower your credit score.
6) Limit Your Loan Search to a 30-day Period
Every time you apply for a loan your credit report gets pulled. Fortunately, you have a 30-day window to apply to multiple lenders without having it affect your score.
Everything is Fixable
Your current credit score is neither a fixed number nor a permanent blot in your “permanent record”. With a little dedication and some patience, you can make the life-changing jump from renter to owner.
Want to know more about how to secure a home mortgage with poor credit? Answer a few questions here, and a home lending expert will contact you.