Having some dings on your credit history is not the end of the world and a lot of people can still get a home loan even with fair to poor credit. The caveat is that you'll typically pay more in interest rates and fees just so lenders cover all their bases in case of default. But I don't want you to think that you can't be a homeowner just because you've had some credit issues in the past. Let's talk about five ways you can get the house you really want even with poor or bad credit.
#1. An FHA loan.
FHA loans have been around for decades and this is provided by the Federal Housing Administration offering prospective homeowners with bad credit the opportunity to be a first-time homebuyer. There are a lot of different loans available all falling under the FHA category. There are different assistance programs, options, and interest rates depending on the need and the credit history of the borrower. An FHA loan will require a minimum down payment of 3.5% but it will allow you to have a lower credit score as well. This may also be a less expensive option than conventional loans but in the long run, you may have to pay mortgage insurance, which is a protective measure put in place by the lender should you default on the loan.
#2. You can refinance any student loans.
Saving that initial down payment can be a struggle, especially if you have bad credit and lots of money going out every month. Refinancing your student loans before you purchase a home might be a good way to save up some money and show lenders are willing to consolidate in order to get things paid off faster. This could help create more space in your monthly budget and it could reduce your monthly debt payments by refinancing to a lower rate, especially right now. However, a refinance loan will appear on your credit report as a new loan and this could negatively impact your credit score. It's important to discuss this with your lender and check out all the options to find out which direction makes the most sense.
#3. Use a cosigner.
A cosigner means that they will offer up their good credit as a backup to your poor credit. They typically accept responsibility for the loan but their name doesn't go on the property title, which means they have no claims to the house. This means you could qualify for a better interest rate, establish credit for the future, and build a better credit history. However, this might be tricky between you and the person cosigning. There is a financial risk when cosigning on a mortgage so it's important to discuss all options and potential outcomes just in case.
#4. Work on repairing your credit.
One of the biggest things that lenders look at is if you are making your payments on time. Simply by making payments on time even if you have outstanding debt, shows lenders that you are consistent in your payments and will likely be responsible with a mortgage payment. With a better score, you can qualify for lower rates, which means that you may be able to qualify for a higher-priced home as well. However, it could take a while to see the results. If you start now by paying off debt, paying on time, and improving your credit score is still could take up to six months to really see a major difference.
#5. Consider applying without your partner.
If one of the two of you have great credit, simply use that person's credit instead of both. Lenders will look at the lowest credit score, not the highest so take advantage of higher credit scores when qualifying for a mortgage. Your partner's bad credit score will impact your interest rates and you could qualify for a mortgage that you were otherwise denied for. However, the title of the house will be in the person who is approved for the mortgage and this may cause problems down the line.
There are a lot of ways to work on your credit, increase that score, and get the best rate and deal possible but it does take a little bit of finesse and creative financing. We at Ronald Christopher & Associates work with buyers from all walks of life and we love to come up with creative ways to make you a homeowner. Give us a call today.