by Tina Martin
If you’re tired of giving your money to your landlord every month and ready to start building equity in a place of your own, purchasing a home can be a good investment. However, many potential homeowners fear their bad credit will prevent them from achieving this important goal. You can help overcome credit problems when purchasing a home by utilizing these four proactive strategies, presented by the Mama Bear Team.
- Prepare To Deal With Higher Interest Rates
Lenders consider borrowers with bad credit to be higher risks. To make these loans worth the uncertainty, lenders charge higher interest rates. If you don’t need to make a purchase right away, you can obtain a lower rate by taking steps to improve your credit score before you make a purchase.
Another option is to buy mortgage points. A mortgage point is a fee you pay to the lender in exchange for a lower interest rate. The cost of each point is 1% of the total mortgage amount, and each point usually decreases the interest rate by 0.25%. You have the option to purchase more than one point. The value of doing so depends on your financial situation, the size of the loan and the length of time you intend to own your dwelling. By using a mortgage calculator, you can determine how much money you would save with buying points. This option is best for borrowers who plan to stay in their homes at least long enough to recoup the cost of the points through interest savings.
- Pay Down Your Debt
Borrowers who have bad credit need to do as much as possible to make the rest of their financial picture attractive to lenders. One way to do this is by paying off debt. Your debt-to-income ratio is one of the most important factors most lenders consider. This percentage compares the total amount of debt you have to your income. Most lenders prefer ratios below 43%. You can improve this ratio by paying off debt, increasing your income or both.
Another factor lenders consider is credit utilization. Lexington Law explains this calculates the total amount of credit available to you versus the amount of credit you are currently utilizing. If you have revolving credit accounts, you can improve your credit utilization by asking for a credit increase, paying down your balances or both. Don’t close any accounts that you have paid off; this will negatively impact your ratio.
- Determine Your Budget
Another important step in the process is to determine how much home you can afford to purchase. Start by reviewing your finances and making a budget. Add up all of your expenses and compare them to your income to determine your maximum monthly payment. Aim to spend no more than 28% of your annual gross income on a mortgage. Be sure to include the principal, interest, closing costs, insurance, maintenance and other fees in your calculations.
- Consider an FHA Loan
Federal Housing Administration loans exist to make it easier for homeowners who may not qualify for conventional financing to purchase a home. FHA home loans usually require lower down payments and have more lenient credit requirements; in fact, in the right circumstances, it’s one of the lending options that could help you purchase a home with no down payment.
Bad credit can be an obstacle to homeownership, but these four tips can help you overcome this barrier. No matter what your financial situation involves, you can take positive steps to improve your chances of successfully purchasing a home.
When you’re ready to hit the housing market, connect with Mama Bear Team for professional, personalized service.