If you have a credit
score that’s considered fair, poor or even bad, you may be assuming that
qualifying for a mortgage is out of the question. While that’s true for some
would-be borrowers who need to improve their finances as well as their credit,
there are some mortgage options for homebuyers with less than perfect
credit.
Your Credit Profile
Mortgage lenders
rely heavily on your credit score to evaluate your qualifications for a home
loan because your score indicates how you have handled credit in the past,
which serves as a predictor of your future repayment pattern. According to
Credit.com, excellent credit gets a score of 750 or above; good credit,
700-749; fair, 650-699; poor, 600-649; and bad credit is a score under 600.
Rather than guess at
your credit profile, you need to request your free credit report and pay a
small fee to get your credit score from www.annualcreditreport.com. Fix
any errors and take steps to improve your score with improved financial
behavior before applying for a mortgage loan. A lender can help you
determine which steps will boost your credit score fastest, but
depending on your situation it could take at least several months or even a
year before you can push your score high enough to qualify for the lowest
interest rates on a conventional loan.
Loans for Borrowers With Poor Credit
In the thick of the
housing boom borrowers were approved for home loans without providing
documentation of their income and assets. Subprime lenders approved loans for
borrowers with low credit scores, although they often charged higher interest
rates to those borrowers. Since the housing crisis, the majority of subprime
lenders went out of business, but, depending on your circumstances, you may
still qualify for a home loan.
The most commonly
used loan product for borrowers with lower credit scores is the Federal Housing
Administration’s loan program. The FHA insures lenders against potential
default and requires a minimum credit score of 580 or above for a loan with a
down payment of 3.5%. Most lenders, though, require a credit score of 620 or
640 and above to approve an FHA loan. In addition to your credit score, you
will need to provide full documentation of your income and assets and meet the
lender’s debt-to-income ratio, which is typically a maximum of 41% to 43% of
your monthly gross income that goes toward the minimum payments on all of your
revolving and installment debts.
The downside of FHA
loans is that they have higher mortgage insurance requirements than
conventional loans. The mortgage insurance payments must be made for the entire
life of the loan unless you make a larger down payment. However, FHA mortgage
rates are comparable to conventional loans regardless of your credit score, so
you won’t be stuck paying a higher-than-average mortgage rate.
Special Programs for Credit Challenges
The financial crisis
and recession hurt a lot of consumers who lost their homes and jobs. If your
bad credit is a result of a personal financial hardship rather than your own
mismanagement, you may qualify for the FHA’s “Back to Work” program, which
allows borrowers to qualify for a home loan more quickly after a period of
unemployment or reduced income.
The only way to know
with certainty about your ability to qualify for a mortgage is to meet with a
lender who can go over your individual financial circumstances. There is no
charge to consult a lender, so even if you are not ready yet to get a loan
approval, you can still benefit from a lender’s advice about how to prepare for
a loan application.
Source: http://www.realtor.com/advice/how-to-get-a-mortgage-with-bad-credit/
0 comments:
Post a Comment