Everyone has the dream of owning their home, whether it’s a first-time home buyer or a second home, there are financing options available. One roadblock is your credit score.
A low credit score can present a unique challenge to obtaining a mortgage, but there are options available to help. We will be discussing a few options today to get you approved and get you in the house you’ve been dreaming of for years.
The first choice I would like to discuss in an FHA loan. An FHA loan stands for Federal Housing Administration, and they are the ones who will ensure this investment. The minimum credit score needed to be eligible for this type of loan vary with why you need the loan. To qualify for a mortgage with a 3.5 percent down payment, you will need a credit score of 580 or higher. Anyone with a credit rating from 500 to 579 are still eligible; they will just require a 10 percent down payment for the loan.
- If your credit score is 500 or higher, you can move on to the next step, meeting with an FHA-approved lender.
- You can find an FHA-approved lender in your area by going to the United States Department of Housing and Urban Development (HUD) website and searching your area.
- The third step is saving up for the down payment. This move is necessary, and there is no way around it. You must have 3.5 percent of the house’s total cost when you apply for this loan.
- The fourth step is applying for mortgage insurance. Mortgage insurance is to protect the lender if you default on the loan. They will still get the money they borrowed you originally back, even if you default.
- The fifth step is getting the necessary documents ready. You will need addresses you lived in the past two years, two years’ worth of steady income proof, W2 forms from the last two years, and Income tax forms that were submitted the previous two years.
- The sixth step is to apply for the loan and once approved, have the property you are considering appraised. If the property passes the appraisal, you can move on to signing closing papers and getting your keys for your house.
Other Ways to Qualify
If an FHA loan doesn’t seem like the right fit for you, there are other options out there to help get you in your home. Boost your credit score. Eliminate credit card balances if it is possible, and watch your current balances carefully. If you’re able, pay off any debt you currently owe. You can negotiate with collections companies to have the negative information removed from your credit score for payment of the debt. Pay your bills on time, because this is one thing that can sink your credit score. If you currently have missed payments, catch up as quickly as you can and stay caught up.
Find a Co-signer
A co-signer is someone with good credit who will co-sign the loan with you. You must keep in mind that this is putting your co-signer on the hook for paying your debt if you default on the loan.
Make a higher down payment. Making a higher down payment will lower the risk to the lender. They will be more willing to work with you if you put a nice sized down payment down on your mortgage. If your down payment is 20 percent or more of the total loan, you’ll save money by not having to get private mortgage insurance. Consider an adjustable mortgage rate. You will be paying a high mortgage rate in the beginning because the lender needs reassurance that you will pay, and pay on time.
If you have an adjustable mortgage rate, this should help lower your mortgage payments down to a manageable level. The thought of being a low credit score home borrower who is trying to get a mortgage loan can be daunting. You have to work at it and work hard, but it is possible. The reward is well worth all the work you will put into it. An FHA loan is more work than a traditional loan, but it is designed to help lenders with low credit scores get into the homes of their dreams. Raising your credit score can also be daunting and hard work, but if you follow the steps outlined in this article, you will have the success you’re looking for in your home buying venture.