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Tuesday, December 10, 2013

How to get a home loan with bad credit

Put your fears about bad credit aside. Just because you have bad credit, filed bankruptcy or have gone through a foreclosure does NOT mean you cannot buy a home.

When it comes to buying a home, we usually think of the ideal applicant as a "triple threat" - perfect credit score, large down payment, and a low debt to income ratio.  However, just because you don't have excellent credit and don't consider yourself a perfect applicant does not mean you have to rule yourself out of future home ownership.

Previous homeowners who suffered through bankruptcy and foreclosure can still qualify for a home.  Lending requirements have changed and other compensating factors are now taken into consideration when applying for a home loan.  The best thing you can do to improve your chances of obtaining a mortgage is to highlight these compensating factors with your mortgage lender.

Illustrate discipline.  This is a big determining factor.  Lenders can be understanding and even forgiving of a bad credit history.  However, you must prove to them that your bad credit is a thing of the past and that you've learned to budget and save.  Start out by discussing what you have done to start improving your credit score again.  If you've been working with a credit repair company, paying off collections, or just ensuring that all payments are made on time, these are all things your lender will want to know.  If you've been allotting a certain amount of money each paycheck to a savings account or maybe you started allocating money to a 401k, also stress this to your lender.  Showing consistency and stability in your payments can mean a lot when determining your loan eligibility.

Stay within your means.  Though your agent might be pushing you to buy a home that you can afford, think about the long term financial responsibility.  Just because your lender or bank says that you are approved for a certain loan amount, does not mean you have to push that to the limit.  Only you know your unique financial situation and often times you may be able to find a house that is almost as perfect for a much more reasonable price than the luxury home you dreamed of.  Though you may have to give up that extra yard space or storage room, the $100-$200difference in your monthly payment will make a huge difference in the long scope of things.  Often times, the lower your debt to income ratio, the better chance you have of being approved for the loan.

Document everything.  Almost nothing about the loan process is stated, and must be actually proven.  This goes for income, tax returns, and even monthly obligations like child support or annuity.  Be prepared to provide documentation for any compensating factors like bank statements, cancelled rent checks, etc.  If you cannot produce certain documentation to your lender, it can raise red flags during the loan process.

Stress your job stability.  If you have been working at the same company or even same industry for several years, be sure to note that on your loan application.  Also, be sure to mention any raises you've received.  In addition, any yearly bonuses or commission compensation should be discussed too.  Proof of stable and increasing income will help your lender know that you will be prepared in case an emergency should occur.

Assert your willingness to stay put.  Lenders like to know that you are committed to your home.  Sure, you'll want to upgrade or maybe downsize in the future, but for the mean time show that you are willing to spend a decent amount of time in your home.  If you have the kind of job that is likely to relocate you, this could affect your chances of being approved for the home.  Having strong ties within your local area is definitely a plus.

Increase your down payment.  A general rule when it comes to mortgages, the higher the down payment the quicker the home loan approval process is.  Yes, you can still get into a home with 3.5% down but in general, a down payment of 10 percent or more is recommended.  If you can't come up with that money on your own there are a few options.  Check in your local area for first time home buyer or down payment assistance grants.  Gifted down payments are also an option with some loan programs.

Mortgage 101: Using a gift for your down payment. 

When it comes down to it, there are quite a few factors that can raise a red flag to your lender so the best thing is be prepared before you start the loan process.  It is not impossible to get a home loan with bad credit, it just requires a little bit of planning.

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