July 23, 2019 Posted By: growth-rapidly Tag: Buying a house
Life is full of surprises. Just when you think you have everything figured out, a roadblock, like losing your job, presents itself. And a few months later you realize that you have missed on a few credit card payments.
When applying for a mortgage loan, mortgage lenders not only assess your ability to repay the loan, but they also review your credit report.
Click here to find the best mortgage lenders for low or bad credit score.
And if your credit report does not reveal a good credit score, then getting a mortgage loan to finance your property can be quite difficult. If you’ve found yourself in this situation, do not despair yet. There are a few things you can do to overcome a low credit score. Here are a few tips to get started:
1. Meet face-to-face with a lender and be transparent
When you have a low credit score and you have run out of time to fix it, one of your best options is to meet face-to-face with a lender and explain your situation.
Indeed, there are some lenders out there who are inclined to offer you a home loan despite bad credit after taking into consideration your unique circumstances.
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When a lender runs your credit through a computer, you risk to be automatically rejected if you don’t meet the computer’s prerequisites.
But when you sit down with a lender and explain your poor credit, the lenders will be able to reach a deeper understanding on whether you are able to repay the loan.
So if you have a bad credit score, it’s best to be transparent and upfront about it.
2. Show that you have a full time, stable job.
Although your credit score is an essential lending requirement, it’s not the only thing a lender looks at.
Being able to show that you have a full time, stable job is another way to increase your chance of getting a loan even if you have a low credit score.
A good income will show that you’re able to make the payments on the loan despite a bad credit score.
Related: Apply for a Mortgage Loan Today
3. Have a bigger down payment.
A bigger down payment, say 20% + of the home purchase price, makes it more likely to get approved for a loan despite having a low credit score.
Furthermore, and more importantly, putting at least 20% down will allow you to avoid paying private mortgage insurance (“PMI”), which is an additional monthly payment you make on top of your monthly mortgage payments.
A PMI is a way to assure the lenders, that if you, as a borrower, default on the loan, the bank will be covered by mortgage insurance.
Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisor. SmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.
4. Consider applying for an FHA loan.
Since you have a low credit score, you may assume that you have little to zero chance with a lender. But did you know that you still can get approved for an FHA loan?
Depending on the amount of money you’re seeking as there are limits, an FHA loan may be the right loan for you.
An FHA loan is loan that’s insured by the Federal Housing Administration. FHA Loans are very popular among first time home buyers because they require a much lower down payment (3.5%) and a very low credit score (580).
So if you have a low credit score of 580 and can meet the other FHA loan requirements, you should be able to a home loan.
Click here to compare FHA loan rates
For more information see: FHA Loan Requirements – Guidelines & Limits.
5. Avoid applying for more credit prior to loan approval.
A low credit score is itself not a good sign. But the more debt you’re applying to prior to seeking loan approval can significantly damage your file.
You see, every time you’re applying for a new credit, it can be a credit card, a car loan or a personal loan, it goes to your credit report. And the more inquiries you have on your credit report raises a red flag that you’re experiencing financial difficulty.
These are just a few tips to consider when shopping for a home loan with a low credit score.
Tips to raise your credit score:
Although you still can get a loan despite having a low credit score, it’s not always the best decision. For one, it comes with higher interest rates.
So if you’re not in a rush, your best bet is to put buying a house on hold and work on improving your credit score. Here are a few tips to improve your credit score. For more information, read: How To Raise Your Credit Score To 850.
–Always pay your bills on time and in full. Payment history accounts for 35% of your total credit score. So whether it’s a credit card or a phone bill, stay on top of these payments
–Keep your credit card utilization rate below 30 percent if your total balance.
–Be stable. One thing that may make you a low risk borrower before a lender’s eyes is having a stable job. Lenders love stability. So if you have been with your current job for a while, that will work in your favor.
–Get a credit card if you don’t have one. You may think having a new credit card may hurt you, but it can actually help you if you’re able to manage it properly.
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