Getting a mortgage with a low credit score is possible but it becomes a little tricky especially when compared to having a good score. But even if your credit score ranges from 500-620, which is below the average credit score, there are ways to boost your chances of getting qualified for home loans. It takes time, effort and understanding to ensure that the circumstances that surround your credit situation are more appealing to the lenders.
Check Your Credit Report It is recommended that you get copies of your credit report from the three credit reporting agencies which include Equifax, experian and Transunion. Read the reports thoroughly and argue against any information you think is incorrect, such as payment made late that was actually made on time. Having mistakes corrected can increase your score. Also see which elements are pulling down your score for instance, credit utilization rate or accounts in collection. Managing and reducing credit card balances, as well as paying off collection accounts, are other ways to rebuild a credit score.
Regaining control of your debts Creditors want to know that you can handle credit well and that is why you need to have a good credit utilization ratio. Pay on due dates all the credit accounts and loans from the next time. Try to reduce balances as much as possible especially on credit cards. If there is collection or prior bankruptcies appearing on your credit report, clear them with the credit bureaus. Although such a history cannot be erased, documenting to the lenders that such issues have been fixed may help.
Collect Papers and Records Pertaining to Income and Resources This is because lenders will need you to provide proof of your present income, the tax returns, the check and savings/ investment account statements. Collect these papers and ensure that the papers depict a consistent and reliable monthly income. It is also possible to prove that one has asset reserves necessary to show lenders that one is capable of making mortgage payments even in the event of loss of a job.
Think about FHA or VA Loans Federal Housing Administration and Veterans Affairs home loans are unique for the low credit score clients who are not eligible for conventional loans. In some cases, the minimum scores required for these programs can be as low as 500 and even some of them can have no minimum score requirement at all. VA loans are only available to military personnel and veterans while FHA loans are available to all borrowers who qualify based on debt ratios and down payment. Flexible: Some of these programs are more flexible, so it is wise to check for more details based on the school or program of your choice.
Improve Your Debt-to-Income Ratio High DTI compares monthly payments on the debt to gross monthly income, which determines the capability of a borrower to repay the loan. This ratio should not exceed 43 percent, which is the threshold that most lenders advise. Check your spending habits and identify ways to reduce your spending so that more of your income can go towards paying the mortgage. Potential strategies to lower the ratio include trading in a car for a vehicle with lesser monthly installments. This important ratio can also be lowered by paying down balances on credit cards and personal loans.
Bring More Money to Make a Bigger Down Payment Although you may be eligible to purchase a home with very little money down, a larger down payment proves to lenders that you are a serious buyer. Ideally, you should try to make a down payment of at least 10-20 percent if you have a low credit rating. This decreases the Loan to value ratio for less risk perceived by the lender. Capital invested ensures that you are less likely to be in a position to abandon the mortgage. If in need of down payment, call relatives who can offer assistance to fund for it.
Select the Proper Loan Programs There are also federal and state programs that offer more leeway for low credit score clients to finance their purchases of homes. It is extremely important that you do your homework on these programs and what is required before applying for a mortgage. Be ready to do some research and contact several of the loan lenders in order to compare the interest rates and the fees being charged. The loans that are backed by the government give more opportunities for the people to be flexible in their financial planning but it also means strict planning on their financial resources.
Boost Your Score Continue to meet all other expenses on time as you save for a home and search for mortgages. Actually being able to avoid having credit card balances every end of the month is really a big plus in showing creditworthiness. If possible, the amount of money that should be paid each month on credit cards should be more than the minimum amount stated on the statement. Restrict new credit applications that may lower scores for sometime. To increase your chances of being approved for a mortgage, it is wise to correct any mistakes made in reporting and ensure accounts are up to date, at least for the next few months.
Get Preapproved It is very helpful to go through preapproval process before the actual process and especially for those buyers who have bad credit scores between 500-600. This reveals more information to lenders about your financial background to enable them make a better first assessment on whether to approve your loan or not. Attach sufficient evidence of the ability to meet the mortgage obligations together with the application. This makes for a smoother final loan approval after finding a house if you have a preapproval letter from a lender already.
Be Patient Be prepared to secure a mortgage than those borrowers with higher scores if you fall in the under 620 score category. You will be subjected to more scrutiny from the lenders because you pose slightly higher risk to them. Just remember that when you first start asking people, you are bound to be turned down at least a couple of times. Keep on fixing and working on your credit, savings, and other aspects of your financial infrastructure and do not give up. But with dedication and focus on the right behaviors that foster better management of ones financial status in the long term, owning a home is not far off.
