Posted by Christine Owens on August 17, 2017
Buying a Home with Poor Credit – What You Need to Know
We have all seen what can happen when individuals who are not capable of affording their home or paying their mortgage are approved for loans. The housing crisis was devastating for homeowners and the economy. But, some individuals have made previous mistakes with their credit that can impact their credit score for a long time – even if they are on the right financial track now. If you have poor credit but want to buy a home, you need to be prepared for an uphill battle when acquiring a mortgage loan. The good news is that what happened in your past does not have to dictate your future, but you also need to prove that you are a trustworthy loan applicant now for mortgage lenders to be willing to extend you a loan. Credit scores range from 300 – 850 and, generally, a low or “poor” credit score is a score that is under 620.
When you submit an application for a home loan the lender will look at your income, your debt, the home’s value and your creditworthiness so it is not your credit score alone that impacts your ability to secure a loan. Even if your credit score is poor, you may be able to demonstrate your current financial situation (and projected future financial situation) is improving/strong. Before you even submit an application it is a good idea to look at your credit score and if you find anything that is inaccurate, contest it. The process to remove inaccuracies can take some time so the sooner you start the better. Next, it is best to pay down your debt as much as possible because that will improve your debt-to-income ratio (DTI) which will make you a more appealing loan candidate. Further, do not open any new credit cards or apply for any other loans while you are applying for a mortgage because it can negatively impact your ability to get a mortgage loan.
In addition to reducing your debt and trying to improve your credit score, it is advisable to save as much for your down payment as you can. The larger your down payment, the more appealing your application will be. It will also show the lender that you are in a stable financial position and capable of making your monthly mortgage payment. There are a few different mortgage products that may be ideally suited to those with poor credit scores. First, an FHA mortgage is a loan that is backed by the Federal Housing Administration and they have more lenient standards for credit scores. Additionally, if you are a veteran, a VA loan may be an ideal mortgage for you because it does not require a down payment and does not have set credit score limits. Additionally, you may consider asking someone with a better credit score and financial situation to co-sign for your mortgage. This can help you secure your loan but you and your co-signer should be aware of the fact that it creates a serious financial tie between the two of you because if you encounter financial trouble and cannot pay your mortgage, your co-signer can be held legally and financially responsible. If you have a poor credit score, speak to a qualified and experienced mortgage lender to learn what steps can improve your chances of securing the mortgage loan that you need to buy your home.