October 1, 2023

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Home Loan Tips: Low Income Low Credit Score Home Buyers

Path 1: Find out your credit score

Knowing your credit history is the key to knowing what affects your credit score! Your credit report contains details such as your personal information, payment history, and whether you have filed for bankruptcy. Getting a credit report can help you spot any discrepancies so you can report errors, pay off debt, and improve your score. The three major credit bureaus (Equifax, Experian, and TransUnion) use slightly different metrics to measure your score, so you should expect different numbers for each inning, although they may be within the same general range.

Anything below a 670 FICO score is considered “bad credit,” according to Experian, one of the three major credit bureaus. More specifically, average scores are 580 to 669, while poor scores are 300 to 579. The problem with bad credit is that it’s not the same as someone else’s bad credit. To help you determine your credit profile, the different credit score ranges are grouped into the following categories:

● Poor (below 640): Lenders consider borrowers in this credit score range to be high risk. Poor credit means you may not qualify for a traditional mortgage, but you may be able to get a government-backed home loan.

● Fair (640 to 699): Lenders consider borrowers in this credit score range to be low risk. You may have less debt or stronger payment history than a borrower with poor credit. You can qualify for a traditional mortgage with fair credit, but you may need to get stronger in other areas to make up for that, and you may be saddled with higher mortgage rates.

● Good (700 to 749): With good credit, it will be easier for you to qualify for a mortgage and get low-interest rates. You may get quotes from multiple lenders.

● Excellent (750 and above): A good credit score indicates your ability to manage debt. You consistently pay on time and don’t use too much of your available credit. Combined with a steady income, you’ll be eligible for mortgages from multiple lenders and be able to choose the cheapest option.

While potential borrowers with poor credit will find it challenging to get a home loan, you just need to understand the options available and how your application will be viewed by lenders to hopefully solve your current predicament.

Path 2: Check for errors on your credit report

Since your credit score is calculated based on the credit data in your credit report, your credit report may be wrong! Depending on the error, your name may be misspelled, there may be an incorrect outstanding loan, a late payment that was not submitted correctly, or some other issue that could be dragging down your credit score, if you see wrong or outdated items— – Usually seven years, but sometimes longer due to bankruptcy, liens and judgments – contact Equifax, Experian or TransUnion, each credit bureau has a process for correcting errors and outdated information.

Path 3: Be willing to pay higher interest

A low credit score represents a higher risk to the lender. To compensate for this risk, any loan they offer will typically offer a higher interest rate (e.g., 5% APR instead of 3%, with a higher score). These single-digit differences may sound small, but when you consider mortgages that last 15-30 years, they add up. Fortunately, even if you start with a high mortgage rate, that doesn’t necessarily mean you’ll be locked into that rate for life. When your credit profile is good, you can explore refinancing your mortgage at a lower interest rate.

Route 4: Apply for an FHA loan

Unfortunately, your qualifying mortgage rate may be higher due to a lower credit score, which means you’ll end up paying more in interest over the life of the loan. Still, it’s a good idea to look around for mortgage rates, options, and terms.

The best home loan option for you depends on how low your score is, but if you have bad credit and your score is below 600, you should probably consider an FHA loan, which comes from a traditional mortgage lender and is federally approved The Housing Authority provides insurance. You may be eligible for an FHA loan with a minimum credit score of 580 and a 3.5% down payment. (You may be able to qualify with a score between 500 and 579, but you’ll need at least a 10% down payment.) However, not all lenders will approve you, as some have higher credit score requirements.

Getting an FHA loan does mean that you need to pay mortgage insurance, also known as a mortgage insurance premium, for the life of the mortgage. Mortgage insurance benefits lenders because it ensures that you don’t stop paying your loan. Currently, the mortgage insurance premium for FHA loans is 1.75%, then 0.7% to 0.85% per year.

Route 5: Choose a higher down payment (Come up with a larger downpayment)

Even if you have bad credit, some lenders may be willing to approve your home loan if you can provide a larger down payment. Larger down payment will show potential lenders that you’re serious about buying a home and may help you get a more reasonable mortgage rate. Some mortgages require as little as a 3% home loan down payment, but if you have a poor credit score or no credit at all, you may not qualify for these options. If you can provide a down payment of 20% or higher, you can increase your chances of getting approval from your lender.

Path 6: Rebuild your credit

If you find yourself ineligible for a loan, you will need to take steps to improve your credit rating. Check your credit report again to see what’s affecting your credit score, then take steps to improve it. Consider reducing your debt-to-income ratio by increasing your income, paying off your debt, or both.

Here are a few things you can take to improve your score:

● Payment History: Your payment history accounts for 35% of your score. This is the main reason people keep saying “pay your bills on time” about your credit score.

● Credit Utilization: The credit limit you are currently using, also known as your credit utilization, accounts for 30% of your score. The more credit you use, the higher your credit utilization, and the lower your score becomes. This is helpful if you want to keep your total credit usage below 30%.

● Credit history: This is often referred to as your “average account age” and is one of the few factors that you have little control over. Your credit history is the age of your oldest credit accounts, the age of your new credit accounts, and the average age of all the accounts on your credit report. The length of your credit history accounts for 15% of your score.

● Credit Portfolio/Credit Type: When you review the report, you will notice that there are several different types of credit in the report. These can be revolving lines of credit (like a credit card) or installment loans (like a car loan or personal loan). Mixed credit is a good thing for your score, it makes up 10% of it.

● New Line of Credit: Accounts that are less than 6 months old are generally considered to have new credit. Every time you add a new account, your score will suffer as it will give you a tough query and lower your average account age. Be careful when applying for new credit, as it counts for 10% of your total.

Co-borrowers

If you’ve tried the above, but it’s still not enough to save your credit score, or if you need a loan in the short term, maybe try a co-borrower. When your credit score is low, credit bureaus may ask you to fill in as a co-borrower to reduce possible losses.

A co-borrower or co-applicant is a person who applies to other borrowers and shares the responsibility for repaying the loan; approval is based on the creditworthiness of the borrower. Co-loans are less risky to lenders because they are repaid through two sources of income rather than a single borrower’s income source. Under a syndicated loan, both borrowers have ownership of the loan proceeds and are equally responsible for repaying the loan balance. Co-borrowers are divided into occupants (occupant co-borrower) and non-occupants (non-occupant co-borrower).

Co-borrowers can be an important indicator if you’re buying a home for the first time, your income still isn’t enough, or your credit score isn’t high enough. But also remember, this person will be closely related to the security of your loan, but, indeed, this role is also very important for novice homebuyers. Credit better than your co-signer can help you get approved for a mortgage or a lower interest rate. However, they will have a huge liability: If you default, you will be obliged to pay your mortgage. If they can’t, their credit score will suffer. In other words, co-signers have to put their savings and credit reputation at risk to help you. This is a big question.

Benefits of joint borrowing

● Lower APR: If both borrowers have high credit scores, it is often easier to get a lower APR or interest rate. That said, if you’re considering a joint loan with your spouse and he has a low qualifying credit score, you’re better off applying alone.

● Higher loan amount: As with interest rates, combining the credit and income of two co-applicants may result in a higher loan amount. This is because the loan will be repaid using two incomes.

● Borrowers share benefits and responsibilities: A joint loan allows two borrowers to share the benefits and responsibilities of the loan. However, keep in mind that if one co-borrower defaults, the other borrower is responsible for the outstanding balance.

● Greater chance of approval: Like co-signers, adding a co-borrower to an application may help borrowers with lower credit scores qualify for a loan. That said, if a co-borrower has a low qualifying credit score, the lender is less likely to make a competitive offer. That means more qualified co-borrowers may repay the loan at a higher rate.

Disadvantages of joint borrowing

● Full Responsibility: In addition to full ownership of the loan proceeds, the co-borrower assumes full responsibility for the repayment of the loan. Therefore, if one co-borrower fails to make a payment, the other co-borrower will be liable to repay the entire loan amount.

● Possible credit score damage: When co-borrowers join forces, they share the responsibility for payment. For this reason, both borrowers’ credit scores could drop if they miss a payment.

● Tensions: The damage that non-payment can cause to syndicated loans is not limited to the borrower’s financial situation. Co-borrowing can also strain the relationship if one borrower fails to make payments and another borrower suffers as a result.

● Collateral Loss: If a lender needs collateral to obtain a syndicated loan, and a co-borrower fails to pay, both parties risk losing their assets. In the case of a car loan or home mortgage, this could mean losing your home or car.

Summary

Even with poor credit or low income, there are other ways you can buy a home and shop around to find a good mortgage rate. You may qualify for a better rate than you thought, and even if you can’t, you now know how to get your score into better shape, don’t forget, if you buy a home with bad credit, you can always fix your credit and refinance your mortgage for better loan terms in the future.