If you’re tired of “investing” by paying someone else’s mortgage, it may be time to look deeper into purchasing a home of your own. It’s more reassuring to know that the money you’re putting toward your home equity each month is going into your own pocket and not your landlord’s. Contrary to popular belief, you don’t always need stellar credit to be approved for a primary mortgage. Although great credit definitely helps, it is far from a necessity.
If your credit score is low, look into a few of these strategies to help you purchase your dream home.
1. FHA mortgage
The Federal Housing Administration does not administer loans directly to buyers. Rather, the FHA acts as backstop for lenders by insuring subprime loans with taxpayer money.
∙ Since the government insures the loan, lenders take on less risk and are more likely to offer a loan to under-qualified buyers and at a below market interest rate.
∙ FHA mortgages are geared toward buyers with traits that lenders would normally deem too risky to lend to; buyers with low incomes, low credit scores, or that have undergone a recent bankruptcy.
∙ FHA mortgages require a much lower down payment that the typical 20%. Some can be as little as 3.5%. For a home listed at $300,000, an FHA loan would require a $10,500 down payment rather than $60,000.
2. Seller Financing
Instead of seeking financing through a traditional lender, a buyer can ask the seller to act as “the bank” and loan them the money to buy their home. This can be an attractive arrangement for a seller who would rather have a stream of income show up in their mailbox each month rather than a lump sum amount. Sellers who are dealing with a saturated real estate market with few qualified buyers or reasonable offers are more likely to be open to this type of arrangement.
∙ Seller financing has become popular because lenders have tightened their requirements since the most recent recession and make unconventional borrowers press through miles of red tape.
∙ To offset asking for lower requirements from a buyer, many sellers that offer their own financing will ask for a larger down payment than a bank would in order to lower their risk since they can’t spread that risk over multiple loans.
∙ Also, seller financing will cost more overall because the interest rate will usually be higher, but beggars can’t be choosers. If it wasn’t for seller financing, you might not have any option to buy a home.
∙ If there is a risk that you might not be able to obtain financing, make your offer stand out from the crowd by making your offer over the asking price. The difference in your monthly mortgage payment will only be a couple hundred dollars.
∙ Employ the services of a professional real estate agent. The money that a good real estate agent makes in commission will be well worth it for access to their expertise and experience.
3. Improve your credit score
Though it’s understandable that you want to buy a home as soon as possible, it likely makes more financial sense to take time off from your home search to focus on improving your credit score. In just a year you can see a significant improvement in your credit score.
∙ Pay your bills on time, especially credit cards, student loans, and auto loans. Try to pay down the balances on your loans and credit cards as much as possible. Lenders generally like to see that you are currently using less than 30% of the credit available to you.
∙ Even if you don’t use them, don’t deactivate old credit cards. Not only do the additional credit lines give you more available credit, but also a longer credit history.
You can buy a home whether your credit score is 500 or 700, although you may not be able to grab the keys and move into your dream home immediately. If you are willing to take a less conventional approach to home-buying, you will acquire your new dream home in no time at all.