Bad credit can be a result of circumstance or not knowing better. A home is one of the biggest purchases most people will make in their lifetime, and it can be a stressful process, even if you have great finances. However, if you’re buying a home and don’t have a great financial history, it may feel intimidating—or downright impossible.
While it may take some work to improve your finances and get your credit rating up, it’s certainly within reach. Almost Home Real Estate Services explains how to get there.
How your credit impacts your purchasing power
If you have poor credit rating, it typically means that you’ll have a difficult time getting approved for loans. The good news is, it’s not terribly complicated to raise your credit score—it just takes some time and due diligence.
One of the biggest things lenders will look at is your payment history. If you have a history of irregular or missed payments, lenders will be more hesitant to approve a loan.
It’s important to pay credit card bills and other loans on time, and if possible, at higher amounts than the minimum payment due. This will show a lender that you have the capability to pay off debt and manage credit.Any normal human will have questions, and we're here to guide.~Michelle Richard Broker/Owner Click To Tweet
Another key area of concern for lenders is your debt-to-income ratio. This ratio is a comparison of all your outstanding debt—student loans, credit cards, car loans, etc.—and your current income.
Lenders will use this information to determine your ability to manage your monthly payments and repay what you’ve borrowed. If possible, aim to reduce your overall debt—this will help improve your debt-to-income ratio and make it easier for you to get approved for a mortgage.
There are a few tricks to follow when preparing for a mortgage application. For instance, it’s not a good idea to pay everything off, such as a car loan. Instead, keep your car loan and keep making regular payments to show your ability to pay regularly.
One thing to keep in mind is that it’s wise to keep your credit card balances below 50 percent of your limit. This will show you can manage debt and thus, keep your credit in good standing.
Buying a house with bad credit
If you’re unable to raise your credit score for one reason or another, you could still qualify for a Federal Housing Administration (FHA) loan. An FHA loan will allow homebuyers to avoid the requirement to verify two years of employment, which can be a major barrier for some.
Low down payments are available with FHA loans—as low as 3.5 percent. However, you may end up paying a higher rate depending on your situation.
Preparing for a home loan
When you’ve determined your mortgage options, it’s time to start budgeting for your big purchase. For some, this might mean saving up for a larger down payment to keep your mortgage payments lower.
For others, it might mean determining how you can reduce your spending in order to afford your mortgage, especially if it’s likely to be significantly higher than your current rent.
You don’t have to let your poor credit or debt dissuade you from buying a new home. The best option is to work on raising your credit score and paying down your debt to appeal to lenders. If you can’t do this, consider applying for an FHA loan that will allow you to get approved for a mortgage.
While your monthly payments might be higher, it will fast-track your plans and allow you to buy a home sooner rather than later. Just be sure to adjust your budget as necessary to help you cover your bases when the time comes to buy a home.
When you’re ready to start looking at listings, contact Almost Home Real Estate Services and we’ll walk you through each step of the home buying process!
Written by Guest Author: Charles Simmons
Many homeowners are faced with the dilemma of whether to sell or to stay, so I set up the To Sell or To Stay website to make the decision a little easier. My hope and goal for this site is to provide some helpful insight and tips to homeowners on the fence about downsizing so that no matter what they decide, their house continues to be a home.