One of the best long-term investments that you can make is to purchase a home, as opposed to renting. Over a long period of time, a homeowner will build a sizable amount of equity in their home and will also be able to hedge against inflation by having a consistent mortgage payment from one year to the next.
Historically, getting a mortgage has had a lot of different credit requirements in order to qualify. While a borrower’s credit score is an important part of any mortgage loan underwriting, those that have a poor credit score can still qualify for a mortgage.
More Down Payment and Equity
One of the best ways that someone can qualify for a mortgage loan, even if they have poor credit, is to have more equity in their home. When buying a new home, most borrowers with good credit will qualify for a FHA home loan if they have as little as 3% down. For those that have a poor credit score, the requirement is a more significant. When buying a new home, or doing a bad credit mortgage refinance, borrowers will need to have at least 10% equity in their homes. Borrowers that have this much equity in their homes when looking for bad credit refinancing or mortgage borrowing could have a credit score as low as 520, as opposed to the normal requirement of 620.
When looking for a new bad credit mortgage or a bad credit mortgage refinance, another way to qualify for a mortgage would be to get a co-signor. A co-signor is an individual that will take on the financial responsibility of a mortgage in the event you default on the loan. When you get a co-signor for the mortgage, the lender will review that person’s financial quality as well. As long as they have an income that can support the loan, and a strong credit score, you should be able to qualify for the mortgage. However, if you miss a payment on the mortgage, it will end up being detrimental to both party’s credit scores.
More Focus on Income
When you are looking to get a mortgage with a poor credit score, mortgage lenders will still be willing to provide you with a loan, but they will often spend more time focusing on other areas of your financial position. One area in which they will spend time focusing on is your personal income. In most cases, a mortgage lender will want for your proposed debt to income ratio to be less than 33%. Any amount higher than this will make the monthly payment seem unaffordable. While 33% is the general rule for most mortgage borrowers, the requirement tends to be lower for those with a lower credit score. In these situations, mortgage borrowers will often have to have a resulting debt to income ratio of 28% or less. This will provide more assurance to the lenders that you can afford to make the payment on a regular basis.
Mortgage Payment History
If you are a current homeowner and are looking for a bad credit mortgage refinancing, the lender will spend more time focusing on your history of making mortgage payments on time. While it is very important for you to have a decent credit history overall, mortgage lenders will often be far more concerned with your history of making mortgage payments on time. If your credit score is low, the lender will carefully review your credit report to see what your history is when it comes to making mortgage payments on time. If you have a poor score, but have shown the ability to make mortgage payments on time, the lender will be more willing to offer you a loan. However, if you have a history of missing payment or have gone through a foreclosure, it could be detrimental.
Accept Higher Costs
When you are looking to get a new mortgage, or looking for a bad credit refinancing, when you have a poor credit score, you will ultimately have to accept that you will have to pay higher costs. While getting a mortgage could be possible, those with poor scores will normally be assessed higher interest rates, fees, and mortgage insurance premiums than those with good scores. Fortunately, after you have made these payments on time for a period of time, you will see your credit score increase. If interest rates are still low at that time, you should be able to qualify for a more traditional mortgage loan.