Just as it determines whether you qualify for other forms of credit, your credit score affects whether you get approved for a mortgage loan. Since most lenders want to see credit scores higher than 700, it can be difficult to get approved for a mortgage with a low credit score of 550. Even if you get a mortgage, you will pay a higher interest rate. Bankrate.com points out that even if your FICO credit score is less than 650, you are going to pay a mortgage interest rate that’s at least one percent higher than someone who has a better score.
Contact lenders in your area and ask to talk to a loan specialist. Let the person know how low your credit score is. Inquire whether the financial institution has any lending options available for people with poor credit. Bear in mind that if you are approved for a mortgage loan at a higher rate of interest, you will be paying more interest over the life of your loan, and usually higher monthly payments.
Improve your credit score. A higher credit score will improve your chances of getting a mortgage and may qualify you for a lower interest rate. Pay down or pay off revolving credit accounts. Personal finance columnist Liz Pulliam Weston recommends focusing first on paying down credit cards that have balances close to their limits. Don't miss any payments or pay accounts late, as consistently paying your bills on time will definitely give your credit score a boost.
Watch your debt-to-income ratio. A lender is going to look at how much debt you owe. The fewer debts you have to pay, the more money you will have left over at the end of the month. Keep your debt-to-income ratio as low as possible -- preferably no higher than 36 percent of your income. While lenders generally base their calculation on your gross monthly income, basing it on your net income will give you a better idea of how much money you can spend.
Estimate how much money you can come up with to put down on a mortgage. Although lenders generally require as much as 20 percent of the home’s purchase price as a down payment, some will accept a down payment as low as 5 percent. However, if you have poor credit, making a higher down payment can help you get approved for a loan.
Apply for an FHA mortgage loan, especially if you are a first time homebuyer. Contact FHA lenders in your community to find out if you meet the criteria necessary to qualify for an FHA loan (see Resources). Loans guaranteed by the Federal Housing Administration allow you to have a lower credit score than if you were applying for a conventional mortgage. With a credit score of only 550, you must have a down payment of at least 10 percent, according to FHA loan requirements. You might also be asked to complete a credit counseling program before applying for a loan.
Talk to a lender about applying for a 40-year mortgage term. Because monthly mortgage payments are lower when stretched out over a longer term, even if your past credit history is poor, you may still get approved for a loan.
Ask a family member to serve as a co-signer for your mortgage. Co-signers take a huge risk, as they will be held responsible for the debt if you don’t make the loan payments. However, a parent or other close family member may be willing to co-sign for your mortgage loan until you get on your feet financially. Once your credit improves, you and your spouse can refinance the mortgage in your names alone.
- Once you get a loan, work on improving your credit from here on in by always making your mortgage payments on time. You need to show the lender that you are trustworthy and able to repay the loan. By improving your credit score, eventually you will be able to refinance your mortgage at a lower interest rate.
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