Lenders before approving a loan check the credit report of an applicant to ensure that the borrower can afford the mortgage and honor the payment commitments.
A poor credit score can impact the applicant’s chances of getting approved. Complying with credit score requirements can be difficult for homebuyers who have faced financial challenges in the past. However, homebuyers with bad credit need not lose hope and can follow the tips discussed in this post to increase their chances of home loan approval. The post is also useful for first time homebuyers who have limited knowledge about the regulations and other factors that can impact the chances of their loan getting approved. Read on.
Every year, you are eligible for a free copy of your credit report from each of the three nationwide credit reporting companies- Equifax, Experian, and Transunion. If you have exhausted this option, you can get the report by paying a nominal fees. Scan the report thoroughly and look for errors such as inconsistent info, duplicate accounts, inaccurate account listings by the lender, and discharged debts. If you spot any error, bring it to the notice of credit reporting companies, and request them to fix the issue. With your application, attach copies of supporting documents, and the report (with the error highlighted). Store copies of all your letters and documents for future reference.
Loans backed by the Federal Housing Administration have relaxed norms as compared to many other conventional options. These loans come with low down payment options, and borrowers with a low credit score can also qualify. The quantum of down payment will vary according to the applicant’s credit score. For example, individuals with a credit score of 580 will have to provide a downpayment of 3.5 percent of the final purchase price. Borrowers with as low a credit score as 500, too can qualify subject to the condition that they provide a downpayment of 10 percent of the home’s final price.
Making a big downpayment is an incentive for lenders as it decreases the chances of the person walking away from the property. Individuals who don’t have enough cash in hand can liquidate assets, for instance their retirement account to source the required amount. Borrowers can also use gift money from relatives to provide the downpayment amount. Individuals using gift money must request the donor to write a letter to the lender explaining that the amount they’re providing is a gift, and not a loan.
Borrowers who were a victim of identity theft, or had anomalies that impacted their credit score must discuss these issues with their lender. They must also provide recent payment records and other documents to assure the provider that the past challenges no longer impact their financial stability. Borrowers must also bring to the lender’s attention any unforeseen expenses such as those involving a medical emergency that forced the individual to default on their payment commitments.
Following these tips can help first time homebuyers and loan applicants with a poor credit history realize their dream of owning a house. Offering to pay a higher interest rate can also improve the chances of borrowers with bad credit getting a loan approval. To avoid additional financial burden, individuals can refinance their loan at a low interest rate.