Qualifying for a mortgage is difficult, especially if you have a low credit score or no credit score at all. Previously, there were dozens of companies willing to approve loans on houses for first time buyers with little or no credit. However, with today’s economy, even the most lenient lenders have tightened their belts and requirements for lending money. Understanding how other factors like payment history, job details and financial stability will help you get a mortgage using other financing options available.
There’s Still Hope, even if you’re a First Time Home Buyer with a Low Credit Score
Understand your credit score and do everything in your power to increase it. If your credit score is lower than 620, you should work on increasing your FICO score by doing the following:
Reduce your current credit card, auto loan and student loan debts by paying them little by little. Or, try to negotiate lower interest rates. Also, try to get a higher credit limit for your credit card accounts. Having less debt compared to your high credit limit will raise your credit score.
Get a free credit report from www.annualcreditreports.com. This is a good source because they don’t ask for a credit card number. Examine your credit report and make sure that there are no errors in the data that the credit bureau has. If a loan that you’ve already paid up still shows as active or pending on your report, call the bureau immediately and have this rectified. Also, if you have a family member who has the same name as you do, make sure that your information is distinguished from his.
If you have an abundance of credit cards that you don’t use, close them. Having too many credit card accounts can hamper your credit score.
Settle debt with collectors. Are any collection agencies calling you regarding unpaid debts or utility bills? Settle your debt with them as soon as you can because unpaid debt that’s been transferred to collection agencies is one of the worse things that could show in your credit report.
Show financial stability in other areas of your life. Most banks will consider a letter from your previous landlords, showing your payment history. You can also show evidence of your income or salary history if you have been with your current employer for at least two years. You may qualify for a loan on homes for first time buyers if you show sufficient proof that you can pay the loan.
Different Financing Options Available for First Time Buyers with a Low Credit Score
1. Federal Housing Administration (FHA) Mortgage Loan- this type of loan is a great idea for borrowers with low credit score because the FHA helps them secure a mortgage by assuming the risk for the borrower. In this type of loan, the FHA acts as a “guarantor” for the first time home buyer, giving them the chance to get a mortgage for as low as 3.5% of the house’s sale price.
FHA loans are the most lenient type in regards to credit score. They generally want to see a minimum of a 620 FICO score. However, there may be exceptions where no minimum credit score is required.
Here are the basic requirements to qualify for FHA financing; keep in mind there are many other “minor” requirements:
a. Stable employment for the past 2 years.
b. Increasing or stable income for the past 2 years.
c. Credit history with less than two 30-day late payments in the past two years.
d. The mortgage you’re applying for should be roughly no more than 30% of your gross income.
e. Borrowers who filed for bankruptcy should allow at least 2 years topass before they apply.
2. No Credit Score Mortgage- this type of mortgage is ideal for first time buyers who have money for a large down payment and closing costs but have no credit score to prove their credit stability. If you’re a freelancer or self employed professional with no credit score, this type of mortgage is perfect for you. Lenders who offer this type of loan require borrowers to pay about 20-30% of the property’s price because they will only finance 70-80% of the sale. Another drawback is the interest, as this type of mortgage has a higher interest rate compared to other available options in the market. You may qualify for this by presenting a recommendation letter from your previous landlords or a good payment history of your utility bills.
3. Co-sign a mortgage with someone who has a good credit history.You may qualify for a mortgage by utilizing a co-signor. This type of arrangement may not be your first choice, since it may put a strain on the relationship if you miss any mortgage payments, so it’s best to explore other options first before choosing this route.
It’s not impossible to find a mortgage on houses for first time buyers,even if you have a poor credit history. It’s just a matter of researching and exploring options from different lenders. Don’t put your dream of owning a house on hold just because you have a low credit score! Go out there and look for options that are suitable for you.
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