Today a reader sent me an email asking how he can buy a Boston condo for sale with bad credit.
Getting a Mortgage With Bad Credit
Are you wanting to buy a Beacon Hill condo but have bad credit? If you are a first-time buyer with lousy credit, getting a mortgage can seem a distant goal. However, it is normal for first-time buyers to have worse credit than those who have purchased a few homes in their lifetime. As a result, there are some options to help you buy your first home.
You might not need the fantastic credit score you expect, and a down payment of 20 percent is no longer the fixed requirement it once was. Some of the best advice for a first-time buyer is spending an ample amount of time getting your financial house in order before you go out and start looking at homes.
Taking the time to work on your finances can put you in a much better position to get better terms on your loan that will benefit you financially both in the short and long term.
Let’s take a look at what your options are as a first-time buyer.
Boston Real Estate Deciding Factors
Even if you don’t have a great credit history, lenders look at other factors to decide on your mortgage application. The credit score needed to buy a house is often mistaken by potential first-time home buyers.
If you can pay a high down payment this improves your chances. Though finding 20 percent of the purchase price for the down payment is going to be out of reach for most first-time home buyers. Luckily, it is a common mortgage myth that you need to put that much money down.
Your employment can play a large part in lenders approving your loan. Do you have a long history of employment? Is there a likelihood of promotion with the current employer? Do you have a high income to loan value ratio?
Other factors could include a good savings account and similar monthly payments to your current rent. If your mortgage payments will be close to what you are already paying for your rental, it shows that you should be able to manage the loan payments.
Finding a Lender When You Have Bad Credit
.It became more difficult for buyers with low credit scores to find a lender in the wake of the subprime mortgage crisis. Lenders increased their credit score requirements, but now more than a decade later, there are increasing mortgage options for people with low scores
The Federal Housing Administration loans program only requires a credit score of 580 and a down payment of 3.5 percent. A lot of lenders will require a 620 score or above, however, though you should find some which will work with you below that score. The low down payment requirement is one of the significant advantages of an FHA loan.
You need to have been employed at the same company for two years or more and the supporting documentation for this income. If you have made late payments in the past, it needs to be more than a year ago to meet the FHA requirements.
Your debt to income ratio needs to no more than 31 percent for housing expenses against your income. And a maximum of 43 percent when comparing your gross income to credit card and other loan debts.
Getting a loan can be difficult if you don’t have any credit history. Perhaps you’ve chosen not to get a credit card in the past, but without a history of credit, the lender will need to find other proof of payment history. They can use utility, phone, or rent bills to show that you make payments on time.
While the FHA rules don’t prevent you from getting a loan because you don’t have a credit history, an individual lender might. Even if they can see that you haven’t missed any payments in the last 12 months, you can expect to pay a higher interest rate on the mortgage.
Current and former military personnel can get help from the VA loans program if they are first-time buyers with bad credit. Benefits can include no down payment or mortgage insurance to pay, and often with a lower interest rate over conventional loans.
Down Payment Assistance
If you are on a low income, you could qualify for a grant. There are state and local programs available to help first-time buyers, check what is available on your local government website or through the HUD site. Another option that is also available with many of these loan programs is getting a down payment gift from a family member. Typically, a close relative is able to gift the entire down payment amount which is a significant perk, especially for those who don’t have significant funds in reserve.
Finding the Best Mortgage Rate
Interest rates and fees will vary between lenders, get at least two or three quotes for comparison. This will give you a better chance at a good deal on your mortgage, which could save you a lot of money over the loan period.
Making applications for credit can harm your score ordinarily, but FICO allows you a 30-day window, where all inquiries on your credit report will only count as one. This is to allow shopping around for a better mortgage deal without harming your score.
Improving Your Score
The bottom line is you can still get a mortgage with bad credit but it is prudent to work on your financial standing. There are things you can do to increase your credit score. This will increase your chances of being approved and reduce the interest you will end up paying.
Checking your credit report and having errors removed can help, as can paying down credit card balances. If you’ve missed payments recently, this will affect your score and could mean that you should wait before applying.
Use Credit Karma When Buying a Home
Another incredibly useful financial tool when buying a home for the first time is Credit Karma. If you have any kind of credit issues whatsoever and want to buy a home, Credit Karma can be a godsend. If you have credit issues, Credit Karma can help with vital credit decisions. For example, do you know what the impact would be on your credit score if you cancel a credit card?
So many people make the wrong decisions when it comes to credit. They do things they expect will help their credit standing but in fact, do the opposite. This is where Credit Karma can offer vital assistance.
Boston Real Estate and the Bottom Line
The take-home message here should be that buying a house with bad credit is not out of the possibility. There are numerous mortgage programs today that are tailored well for those who don’t have the best credit standing.
Hopefully, you have found these tips for first-time buyers to be useful. Continue to work on your credit and you’ll be in a much better place to become a fiscally prudent homeowner.