Buying a home is an exciting and significant milestone in many people’s lives. But it is too a huge upfront investment and a huge commitment over time. You may be unsure whether you are eligible for a mortgage due to income and credit concerns, or your ability to make a down payment. But don’t let doubts stop you from researching. There are many steps you can take to identify and improve your eligibility if you are not quite there.
The great thing about preparing for a mortgage loan is that you can find out your eligibility before you’ve ever deposited any funds or signed any loan documents, in a process called prequalification. A lender runs your financial picture (your income, expenses, creditworthiness) through their system to see how much of a mortgage loan you could realistically afford and whether you are really eligible for a mortgage loan. You can then take this prequalification letter to lenders to let them know that your funding is in order.
“Prequalification can help you understand how much home you can possibly afford and get more serious from agents’ bidding,” said Brian Walsh, senior manager and CFP at SoFi.
Assess (and improve) your credit score
“Before you take out a home loan, it’s important to check your creditworthiness. Ideally, you need a FICO score of at least 620 to qualify for a conventional mortgage, ”said Tyler Forte, Co-Founder and CEO of Felix Homes.
If your score is lower than you’d like, Andrina Valdes, COO of Cornerstone Home Lending Inc said, “It’s still a good idea to improve your credit score. A healthier credit score could entitle you to a lower mortgage rate, which may lower the amount you pay on your monthly mortgage. ”You can improve your credit score by“ lowering your DTI, or the debt-to-income ratio, ”added Valdes . “An ideal DTI should be below 36%.”
This can mean paying off a credit card or making larger payments on an existing debt.
Full or partial payments: Which one is best for your credit score?
Find a lender who works with first-time buyers
If this is your first home buying experience, you’ll want to work with a lender who is specifically familiar with your situation as it is different and will require patience to walk you through the process.
“Ask a loan officer directly and read reviews to confirm that first-time buyers have had a good experience with a particular lender,” Valdes said.
Consider an FHA, USDA, or VA loan
There are a number of loan types that are more aimed at people who do not meet all of the requirements of traditional loans. You could qualify for an FHA loan, a home loan supported by the Federal Housing Administration, Forte said. “It is intended for borrowers who do not meet traditional lender standards.”
The downside is that an FHA loan can have monthly payments – since FHA loans require mortgage insurance regardless of the size of the down payment, according to Nik Shah, CEO of Home.LLC.
In addition, low-income families looking for housing in rural areas may be eligible for a USDA loan administered by the U.S. Department of Agriculture. And veterans, service members, and spouses of deceased service members should apply for a VA loan. “These are great if you have a military service background and need help getting back on your feet and haven’t saved up much for a down payment,” said Shah.
Look for loans that do not require a 20% deposit
While many loans require a 20% reduction to get the home loan, according to Shah. other loans such as “Compliant Loans” (which fall under the Fannie Mae and Freddie Mac guidelines) allow a reduction of up to 5%.
You can pay only 3.5% less with an FHA loan, and even less with a traditional loan – only 3%. That is, if you have a credit score of 620 or higher. However, nothing beats a VA loan that allows you to buy a home with no money.
While a 20% down payment will often eliminate fees and reduce your monthly mortgage payments, it isn’t the only way to buy a home. There are also good reasons to keep your cash for things like home improvement and an emergency fund, Shah said.
Find a co-signer
If the problem with taking out a mortgage is due to poor creditworthiness or insufficient income, but you know you are ready to make payments in the future, consider bringing a co-signer with you on the loan. The lender will consider the co-signer’s income and credit history along with yours. You just want to make sure your co-signer has a strong employment history, reliable income, and excellent credit. And above all: that you are someone you trust.
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Last updated: July 30, 2021
This article originally appeared on GOBankingRates.com: 6 ways to get a mortgage even if you think you are not eligible