Many Americans dream of owning a home one day, yet many of them are held back by the horror known as a credit score. While it is not the only factor, your credit history has a major impact on if you can get approved for a mortgage, and more importantly, how much. A poor credit score equates to high risk, which ultimately leads lenders to reject your application.
Is Owning a Home Impossible?
When you’ve received a few rejections to your mortgage applications, it can leave you wondering if owning a home will ever be possible. While having a higher credit score is beneficial to getting an affordable mortgage, there are other solutions that can help you accomplish your dream of being a homeowner. Check these options out below:
Rent to Own
If your credit score is less than 500, getting approved for a mortgage is likely going to be highly expensive and very difficult (though not impossible). If you’ve tried getting approved through a few lenders with no such luck, you might want to consider a rent to own property.
Such contracts are lease to own options between a homeowner and potential buyer. The rent that is paid each month after the lease is signed qualifies as credit towards the down payment of the house. After the term of the lease has expired, you then use the rent to make a down payment and secure a mortgage for the property.
This option is beneficial because renting with less than stellar credit is a lot easier than trying to get a mortgage right away. You have time to build your credit and also time to familiarize yourself with the property before making a purchase.
If your credit is in the low 600s to 500s you may be able to qualify for an FHA loan. This is a mortgage that is insured through the Federal Housing Administration. Qualifying applicants for FHA loans then pay mortgage insurance which helps to protect the lender should the borrower default on the loan.
FHA loans are popular because lenders are protected and will therefore offer these products at an attractive interest rate. These loans also have flexible eligibility requirements and great incentives. Such incentives might include 3.5% down payment, down payment assistance, and more.
Have a Larger Down Payment
For those who have a credit score below 580 who still want to try their hand at getting a traditional mortgage, you may be required to pay a higher down payment. This would mean that instead of 5% or 10% down, you’d have to be willing to put down at least 20% of the home’s value.
Having a larger down payment shows the lenders that you’re able to foot the bill of the loan despite your poor credit history. Since you have invested more in the property upfront, lenders see you as less of a risk. You’re less likely to default on a property that you’ve invested so much in.
Find a Co-Borrower
Do you have a friend, family member, or significant other that would serve as the co-borrower on the mortgage? If they have better credit than you do, there is a high possibility that a lender will approve your mortgage. Keep in mind, however, you will need to keep the mortgage current in order to prevent messing up the credit history of the co-borrower. Essentially, when you default on payments, the co-borrower is held accountable until the mortgage is paid in full.
There’s always more than one way to skin a cat. If owning a home is something you believe you’re prepared for, and credit is the only thing holding you back, these options should help you to secure a mortgage. However, if these solutions do not help, improving your credit score and saving for a higher down payment is the best option for securing a home in the future.