Purchasing a home is a dream for many people. Whether you are an individual or raising a family, home ownership is a great way to build wealth. However, it generally takes a good credit score to get a home loan. Here are five things to consider if you are looking for a home loan with bad credit.
1. Put More Money Down On The Home
Most banks require at least 10 percent of the purchase price upfront. Putting down 20 percent of the purchase price shows you have the means to make timely payments.
Coming up with more cash also lowers the risk your lender is going to take. Giving you a loan for $80,000 is less risky as opposed to making a loan for $100,000.
2. Think About A FHA Loan
You may not qualify for a traditional bank loan.
Qualifying for an alternate loan may be your best bet to get financing for your home. FHA loans are guaranteed by the government. It makes getting a loan much easier for borrowers with lower credit scores.
3. What Does Your Credit Report Say
Your credit score may not tell the whole story. Borrowers who have a low credit score may be able to pay their bills. The key is to have a clean credit record over the past 12 months. Your ability to pay now is more important than your ability to pay in the past.
4. Lenders Look At An Entire Credit Picture
Lenders want to see that you have a low debt-to-income ratio. How much money you bring in each year will also be important. Borrowers who have a decent level of income could be approved despite a low credit score. Using a debt settlement to pay off old bills will leave you with a lower debt-to-income ratio. This will make lenders feel much better about giving you a loan.
5. Be Prepared For A Higher Interest Rate
Buying a home when you have bad credit is not impossible. What you should be prepared for is a higher interest rate. Mortgage rates for a 30 year fixed-rate loan are around 4 percent. Borrowers with poor credit may have to pay an interest rate above 5 percent at the very least (though your financial specialist can off you the best advice). Another advantage of an FHA loan is the variable rate structure. This allows you to pay a low rate despite a low credit score.
Visit Paramount Equity® and talk to a Financial Specialist