Summary: A house is both a place to live and an investment… a win-win situation // The lack of a high credit score is not a deal-killer // Credit scores can be improved with a little work // Options like seller-financing can be helpful // Find – and use – an experienced real estate agent.
One way or another, the money you pay for your place to live each month is going towards an investment. It can be an investment in your own home, or – if you’re renting a place to live – the money is going into your landlord’s investment in his rental property! Better to make money work for you.
If you’re tired of paying someone else’s mortgage, it’s time to look into purchasing a home of your own. And, contrary to common misconceptions, you don’t need stellar credit to be approved for a mortgage. Yes, it helps… but it’s far from necessary.
Even if your credit score is relatively low, here are a few strategies to try to help you purchase the home of your dreams:
1. FHA Mortgage.
The Federal Housing Administration doesn’t directly administer loans to buyers. Instead, they act as a liaison between buyers and private lenders by insuring the loan through the government.
- Since the government guarantees the loan, lenders are more likely to offer a loan to under-qualified candidates, and also offer the credit at a reasonable interest rate.
- FHA mortgages are tailored to buyers with traits that most private lenders might find “undesirable:” buyers with lower annual incomes, lower credit scores, fresh college graduates, or buyers that have gone through bankruptcy proceedings in recent years.
- FHA mortgages require a down payment of as little as 3.5%. So a home that is listed at $300,000 would require a $10,500 down payment through an FHA lender, rather than the standard 20%, which would work out to $60,000.
2. Seller Financing.
When a seller finances a home, he agrees to allow the buyer to pay the seller directly overtime for the house instead of seeking financing through a traditional lending institution. This can be an attractive option for some sellers who are dealing with an overly saturated real estate market that yields few qualified buyers, and even fewer offers.
- Seller financing is becoming increasingly popular because lenders are tightening up their requirements and making unconventional (“less desirable”) borrowers jump through impossible hoops.
- More often than not, a seller that is offering their financing will ask for a larger down payment to lower the financial risk. It isn’t uncommon for a seller to request 30% to 50% of the purchase price as a down payment.
- Be aware; sellers will still charge you interest on the home. Yet if you are paying a super-sized down payment, the monthly mortgage payments (and resulting interest) will be lower.
- To make the offer more attractive to the seller, consider offering more than the original asking price for the home. For example, if the house is listed at $300,000, you can offer $325,000. This will only cost you a couple of hundred dollars extra per month, but it is a significant enticement to the seller.
- Even if you’re “doing it yourself,” it’s always best to employ the services of an experienced real estate agent. They’re familiar with the complicated transaction process. An experienced real estate agent will be able to guide both you and the seller through the necessary paperwork, escrow account, and promissory note details. Some buyers and sellers may also opt for hiring an attorney who specializes in real estate transactions.
3. Improve Your Credit Score.
Though understandably, you want to buy a home right now, it might make more financial sense for your family to wait a while. Take a year off of your home-search efforts and focus on improving your credit score. Pay off some of your debt and put a little more in your savings account. Typically a year of some simple debt-management changes will make a significant, positive difference in your score.
- You may also improve your credit score by disputing and fixing errors on your credit report. Checking your credit score with the major reporting agencies is a delicate balancing act. You’ll want to check your score. Try to keep the inquiries to a minimum, though no inquiries would be ideal. And of course, pay all of your bills on time, especially your credit cards, student loans, and car payments.
- Pay down the balance on your credit cards. Generally, lenders like to see that you use less than 30% of your available credit.
- Rather than deactivating older credit cards that you rarely use, keep them. Not only do they give you more available credit (which lenders love to see), but also, the older your credit history, the less of a gamble you’ll be perceived as.
Whether your credit score is 589 or 620, you can buy a home. You may not be able to receive the keys to your kingdom at this very moment. But if you’re willing to choose a less conventional approach to home buying or you’re dedicated to improving your credit score throughout the next 12 months, you can move into your new place in no time at all. Also, take help for managing your accounts with Tally Dekho – Tally on Mobile App for Android and IOS.
