If you’re ready to take the next step toward buying a home, then chances are that you need to take a hard look at your credit score. Your credit will have a huge impact on whether you can get a home loan and how much your interest rate will be.
When you have poor credit, your home loan can end up costing you thousands of dollars more over the life of your mortgage. If your credit is bad, getting a traditional mortgage might be not an option for you.
While we always suggest that you take some time to improve your credit before applying for a loan, you may also be able to make some additional steps to increase your chances of getting approved for a mortgage, even your credit is less than ideal.
Consider Government-Backed Home Loan Programs
You don’t have to get a traditional home loan. A government-backed program may offer you a way to get the loan you want without breaking the bank. FHA and VA loans, for example, don’t have minimum credit qualifications. Some VA loans don’t require a down payment. FHA loans only require a 3.5% down payment. The rates of these loans are pretty comparable with conventional mortgages as well.
FHA loans also require mortgage insurance or MIP. This extra cost can either be part of the monthly mortgage, or you can pay it up front. It is generally around 1.75% of your total loan if you pay it up front. If you pay it as part of your monthly obligation, it will be between 0.5 to 1.05% each year. These extra costs mean that you could end up paying thousands of dollars extra for this type of loan.
Understand the Power of Cash
Lenders consider three main things when they are deciding whether to approve your mortgage application:
If your credit score is poor, then you might be able to make up for it in the two other areas. One of the ways that you can do that is by putting in a larger down payment, which alters your loan-to-value ratio.
Ideally, you will have time to work through some credit repair while also saving money for a few months before you apply for a mortgage. However, if you don’t have that kind of time, you may be able to ask family and friends for help to increase your down payment.
Consider Using a Co-Signer
Having someone else who has good credit co-sign on your loan for you could increase your chances of being approved. It could also decrease your overall interest rate as well. Friends and family members could be good options as a co-signer.
You should keep in mind, however, that when a friend or family member co-sign a loan for you, they are putting their own credit and finances on the line. Be sure that you are not biting off more than you can chew when you involve a friend or loved one.
The best way to increase your chances of getting a mortgage is to wait to apply until your score improves—and we can help with that process! Give us a call today to learn more.