Follow these 6 steps to build or repair your credit before house hunting so you get approved for a mortgage that costs as little as possible.
6. Discuss your credit situation with lenders.
Before applying for a mortgage or taking your first house hunting trip, I recommend that you talk to several potential lenders. They want to do business with you and can evaluate your financial situation for free.
A preapproval locks in a mortgage offer for a limited period and saves time, allowing you to buy a property much faster than if you were starting from scratch.
Ask how you can qualify for the best rate possible and heed their advice. Each lender evaluates you differently, so you’ll probably hear slightly different guidelines. Research possible loans, rates, companies, and brokers exhaustively. Buying a home is a major commitment and doing your homework can give you a huge financial reward.
If your finances and credit are as good as a lender needs them to be, you can get pre-approved for a home loan before you begin shopping. This helps you know the price range of homes you can afford and it tells real estate professionals and sellers that you’re a great prospect.
A preapproval locks in a mortgage offer for a limited period and saves time, allowing you to buy a property much faster than if you were starting from scratch. It also shows you the down payment you’d need to bring to the closing table.
Once you have a preapproval, be sure not to open any new credit accounts or make any changes to your financial life. They’re conditional on not having any significant modifications to your income, expenses, or credit. So, keep a low credit profile once you begin the home buying process. If you apply for a new credit card or a car loan while you’re waiting to close on a home loan, you risk spoiling your mortgage terms or losing the deal.
How to Buy a Home With Poor Credit
If you have poor credit, there are a few options to still become a homeowner. One way is to apply for an FHA loan, which is a government program offered by approved lenders. FHA loans are available even with a FICO score as low as 580, if you can come up with a 3.5% down payment.
Problem is, FHA loans come with high underlying fees that add to your loan balance. In other words, it can get you into a home, but end up costing you much more in the long run than a conventional mortgage.
If your score is high enough, you could choose to take a conventional mortgage with a high interest rate and refinance it for a lower rate later. The risk is that you might not qualify for a refinance down the road or that interest rates could move higher, leaving you stuck with a bad rate.
Another option to buy a home when you have sub-par credit is to make a larger down payment. Paying more of your own money to buy a home makes you a lower credit risk to lenders because you’re less likely to walk away from the investment.
My advice is to never buy a home unless you’re certain that you’ll stay there for at least five years. You never know how long it could take to sell a house and you must pay closing costs each time you buy and sell real estate.
And just because you qualify for a mortgage doesn’t mean that you should get one. It’s a big commitment that has to fit in with all your other financial goals, such as putting enough aside for retirement and paying down your existing debt. If renting will save you money so you can accomplish your financial objectives, then that may be the way to go.
But, if buying a home has more advantages and you’re willing to put down some roots, then getting your finances and credit in tiptop shape by following these steps is the best way to start.
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