Just like needing a certain GPA to get into college, you will need to have a certain credit score to qualify for a mortgage. Your credit score is calculated based on the information found on your credit report, including your payment history, length of credit history, credit mix and new credit.
Lenders will check your credit score to determine your ability to pay back a loan and from there, qualify you for a mortgage. But, what if your credit score is less than stellar? Are your homeownership goals unrealistic? If you are struggling with your credit score, here are 5 tips that can help you qualify for a home loan:
Save for a Larger Down Payment
If your credit score is in the lower range, a larger down payment can compensate for your low score. A down payment of 20 percent or more of the home’s value can show lenders that you have the ability to repay the loan, despite your credit score. Paying more money upfront will increase your equity in the home, and simultaneously lower your loan-to-value ratio. The big picture being that the more you invest in the house, the less likely you will be to default on the loan – which also means less risk to your lender.
Check your Credit Report for Errors
Lenders encourage prospective homebuyers to review a copy of their credit report in advance of applying for a loan. Review your report for any errors, such as accounts that don’t belong to you or misreported late payments. If you find any errors, you can file a dispute and once the errors are removed, your score may increase.
Ask Someone to Co-Sign
If you don’t think you can get approved on your own, consider asking someone with a better financial situation to co-sign the mortgage. This can be a spouse or relative. Just like the lender examined your finances, your co-signer’s credit, income, DTI and other financials will be reviewed as part of the application process. Your co-signer will have equal share in the home, creating serious financial ties between you and him/her, so take great consideration into who you ask to co-sign.
Consider FHA Loans
The Federal Housing Administration (FHA) provides assistance to homebuyers whose credit needs work or lacks funds for a large down payment. The FHA doesn’t directly offer mortgages, but instead insures mortgages provided by FHA-approved lenders. FHA loans are known for their flexible parameters such as easier credit standards, low down payment options and higher DTI ratios, amongst other items. However, FHA loans can be pricey in terms of mortgage insurance since all FHA loans require mortgage insurance despite the down payment amount.
Review your Options
Consider all your options! Experts recommend talking to at least three different lenders to see what you qualify for in terms of loan amount and interest rate. Ask friends, family or local real estate agents for recommendations for loan advisors. The Consumer Financial Protection Bureau’s website can help you explore interest rates in your area based on your credit score range to give you a better idea of what a competitive rate may look like for you.
Need more information on how to buy a home with your particular credit score and financial profile? Consult a loan advisor today!