A poor credit score and low income pose increased risk for mortgage lenders. Although a low income hurts your purchasing power, you can buy a home by documenting stable earnings for the past two years. Low scores or recent derogatory accounts increase your mortgage acquisition costs and interest rate, assuming you can qualify. Once you look past the drawbacks of having poor credit and low income when buying a home, there are several measures you can take to optimize your loan options. A mortgage can boost your credit after several on-time payments and home ownership makes a sound investment when it's within your means.
Pull your own credit report or ask the mortgage-lending consultant to pull it for you. They typically require you to fill out a residential loan application and pay a minimal fee under $20 for a report and credit analysis. Whether you obtain the report yourself or through a third party, make sure to review all credit trade lines for accuracy. Errors and fraudulent activity can be resolved by providing specific proof to the collector, potentially saving you money on your home loan.
Determine how your credit impacts your initial investment known as the down payment. Speak with a mortgage broker, who deals with various lending institutions at once. Also, consult your personal banking provider's mortgage-lending department for programs it offers customers. Mortgage lenders often forgive credit missteps if the buyer can increase his cash contribution to the deal. That's because the more money a borrower puts on the line, the less likely he is to default. It also shows an ability to save money and build reserves, despite low income or past financial mismanagement.
Gather a down payment based on the lender's requisites. For example, lenders that make loans for the Federal Housing Administration (FHA) -- a government mortgage insurer -- require more money down from borrowers with poor credit. As of 2013, a 640 credit score is needed for the agency's minimum 3.5 percent down-payment programs. Borrowers with as low as a 500 score may qualify with at least 10 percent down; however, FHA-approved lenders for this high-risk category are scarce. A conventional loan may offer a 5 percent down-payment program to customers with a 620 or higher score. Below this, you can expect a 20 percent minimum requirement. Ask the lender where the funds must come from. The FHA allows borrowers to obtain gift funds from family and certain pre-approved sources. Many conventional lenders, however, require you to come up with the money yourself based on your poor credit history.
Reduce your debt-to-income (DTI) ratios by increasing your down payment contribution and paying down debt. Debt-to income ratios compare the amount you owe on credit cards and loans to the amount you earn each month. The FHA offers expanded DTI ratio guidelines for low-income borrowers, allowing you to use 31 percent to 43 percent of your income to cover housing and debt obligations. Conventional lenders typically allow you to spend no more than 28 percent, especially when you have a poor record of keeping up with payments.
- Lenders have minimum waiting periods after bankruptcy and foreclosure which can keep you from buying for several years, despite your credit score and down payment. Check with the specific lender to determine loan seasoning requirements if you have serious derogatory credit accounts.
- You can offset modest earnings by keeping your housing payment as low as possible. Lenders typically tighten standards for borrowers with bad credit, making you adhere to stringent DTI guidelines. You can also use cash reserves exceeding your down payment requirement to pay down high-interest debt. This not only improves your credit score, it increases your borrowing power.
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