How to Buy the House of Your Dreams Even with a Low Credit Score
It's reassuring to know that the large sum of money you're putting towards your home each month is going towards an investment. And, if you're a renter, your money is certainly going towards an investment - your landlord's investment, that is!
If you're tired of paying someone else's mortgage, it's time to look into purchasing a home of your own. And, contrary to common belief, you don't need stellar credit in order to be approved for a mortgage. Though it helps, it's far from necessary.
If your credit score is low, try these strategies to help you purchase the home of your dreams:
1. FHA mortgage. The Federal Housing Administration doesn't directly administer loans to buyers. Rather, they act as a liaison between buyers and private lenders by insuring the loan through the government.
· Since the government insures the loan, lenders are more likely to offer a loan to under-qualified candidates, and also offer the loan at a reasonable interest rate.
· FHA mortgages are tailored to buyers with traits that most private lenders find to be undesirable: buyers with low annual income, low credit scores, fresh college graduates, or buyers that have undergone bankruptcy within recent years.
· FHA mortgages require a down payment as little as 3.5%. So a home that is listed at $300,000 would require a $10,500 down payment through an FHA loan, rather than the standard 20% which would pan out to $60,000.
2. Seller Financing. When a seller finances a home, he agrees to allow the buyer to pay the seller directly over time for the home, instead of seeking financing through a traditional lending institution. This can be an attractive option for some sellers who are dealing with an overly saturated real estate market that yields few qualified buyers, and even fewer offers.
· Seller financing is becoming increasingly popular because lenders are tightening up their requirements and making unconventional borrowers jump through insurmountable hoops.
· More often than not, a seller that is offering financing will ask for a larger down payment in order to lower his risk. It isn't uncommon for a seller to request 30% to 50% of the purchase price as a down payment.
· Be aware, sellers will still charge you interest on the home.
· To make the offer more attractive to the seller, consider offering more for the home. For example, if the home is listed at $300,000, you can offer $325,000. This will only cost you a couple of hundred dollars extra per month, but is a large enticement to the seller.
· Always employ the services of experienced real estate agents, as they'll be familiar with this complicated process. An experienced real estate agent will be able to guide both you and the seller through the necessary paperwork, escrow account, and promissory note details.
3. Improve your credit score. Though it's understandable that you want to buy a home right now, it might make more financial sense for your family to wait a while. Take a year off of your home searching and focus on improving your credit score. Typically, all it takes is a year to see a significant difference in your score.
· Increase your credit score by disputing errors on your credit report. Try to keep the inquiries to a minimum, though no inquiries would be ideal. And of course, pay all of your bills on time, especially your credit cards, student loans and car payments.
· Pay down the balance on your credit cards. Generally, lenders like to see that you use less than 30% of your available credit.
· Rather than deactivating older credit cards that you rarely use, keep them. Not only do they give you more available credit (which lenders love to see), but also, the older your credit history, the less of a gamble you'll be perceived as.
Whether your credit score is 589 or 620, you can buy a home. You may not be able to receive the keys to your kingdom at this very moment. But if you're willing to choose a less conventional approach to home buying or you're dedicated to improving your credit score throughout the next 12 months, you can move into your new place in no time at all.