If you think having flawed finances
will stop you from buying a home, you need to hear what these mortgage experts
have to say. For example, you may think that the three-digit number known as
your credit score could spell doom for your plans to purchase a home. But don't
rip up that mortgage application just yet.
"Believe it or not, it is not
as difficult as one may think to purchase a home with less than perfect
credit," says Eric Small, a consultant for several mortgage banks in
Orange County California.
Read on to learn about some common
financial problems - and the savvy solutions recommended by mortgage experts.
#1 - High Debt-To-Income Ratio (DTI)
If you've looked into getting a
mortgage, you may have heard the term "DTI." So, what exactly is it
and how can it impact your ability to get a loan?
DTI is your debt-to-income ratio - a
percentage calculated by dividing your monthly payment on long term debt by
your gross monthly income, explains Alyssa Schwabe, content and social media
coordinator at GSF Mortgage Corp. "The higher their DTI, the harder it can
be to get a loan," she explains.
"Lenders and investors like to
make sure a borrower is not going to fall behind on their payments," says
Schwabe. So what constitutes a high debt-to-income ratio? You can look to the
recent Dodd-Frank Act to get a clear idea.
"The new lending regulations
are going to limit borrowers to a 43 percent debt-to-income ratio," says
Small. When banks sit down to calculate what they think you can afford, they
include all your current bills along with what the new mortgage will cost you
Homebuyer Solution: "Consider cutting back on items that will reduce your
perceived ability to pay monthly debt," suggests Gloria Shulman, founder
of Centek Capital Group and a Southern California mortgage broker with 30 years
of experience."A good place to start is your choice of vehicle. Instead of
financing that fancy new car that is a depreciating asset, consider buying
something used with either lower monthly payments or cash."
Or if you're in the midst of paying
off your car, Anthony Pili, vice president at Greater Hudson Bank in Bardonia,
NY, suggests another strategy for lowering your DTI. "If you have a car
loan with 12 months remaining, refinance it for an additional 36 months to
lower the payment. Of course, you can still pay it off in 12 months but your
ratio will be improved so that you can obtain your mortgage."
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#2 - Low Credit Score
"Your credit score is the
single most important snapshot of your credit health and represents all the
information on your credit report - including your credit accounts and payment
history," says Ken Lin, chief consumer advocate for Credit Karma, a
personal finance site.
Lenders see a low credit score and
worry that you're not a reliable borrower - so this could negatively impact
your odds of being approved for a loan. And if you still qualify for a loan, a
low credit score could still cost you.
"Credit scores are directly
tied to interest rates," says Amy Tierce, regional vice president of
Fairway Independent Mortgage Corporation in Newton, MA. "The lower the credit
score the higher the risk associated with the loan, therefore the higher the
Homebuyer Solution: "Get copies of your credit report; write down the most
important aspects of your financial situation and your homeownership
goals," says Dana Anghel, loan officer in Sandy, UT. "Then discuss
your situation with a mortgage professional (or two) and ask them which areas
need improvement. Work with someone that feels both honest and helpful."
In addition to assessing your
credit, you should make all payments on time, clear up active collections
against you (with the help of your mortgage lender), and keep your credit
balances below your 50 percent max balance, says mortgage banker, Michael Metz.
"These steps will help show the credit agencies that you're low risk, and
this will help improve your scores," Metz says.
#3 - Low Down Payment
For many aspiring homebuyers, buying
a home seems out of their reach. A major factor deterring them is the
traditional 20 percent down payment. While that's been the standard for quite
some time, saving that much cash today can be a real challenge.
But thankfully, 20 percent is not
set in stone as the only percentage that will get you a mortgage. Lenders are
lowering minimum requirements, including the down payment, to attract
borrowers, notes a November 2013 report by Lending Tree. And with home values
improving and homebuyers less likely to default on their loans, lenders aren't
as worried about lending with less cash down from qualified borrowers.
In fact, the average down payment on
a house has dropped to 15.73 percent, according to Lending Tree. But if
that figure still seems like a difficult feat, there are other solutions to
help you purchase a home with an even lower down payment.
Homebuyer Solution: Depending on your situation, you might be able to find a way
to buy a home with a low down payment. So check out these different strategies
to see if any of them could help you get closer to your homeownership dreams.
• Conventional Loan: If
you have a good credit score of 700 or above, you can get a conventional loan
with a down payment as low as 3 percent, says Anghel. With a minimum of a 620
credit score, you can get one with a down payment as low as 5 percent.
• FHA Loan: The Federal
Housing Administration (FHA) loan option might be the right choice if you have
a low credit score, says Small. With an FHA loan, your credit score only needs
to be 500 to qualify for a 10 percent down payment loan and above 580 to
qualify for the 3.5 percent down payment. Keep in mind, however, that only a
few banks offer this type of loan to borrowers with credit scores this low, he
• VA Loan: The Veterans
Affairs (VA) loan has similar criteria as the FHA loan, says Small. But it's
geared toward past or present military personnel. The aim of the VA loan
program is to provide home financing to eligible veterans where private
financing isn't generally available, typically in rural areas and small cities.
Veterans may also be able to purchase a home with no down payment through a VA
• State-Sponsored Down
Payment Assistance: Another option for borrowers are down payment
assistance programs sponsored by certain states, municipalities, and non-profit
organizations, says Cook. For example, in Ohio, there is a state loan program
that may offer assistance for a down payment as little as 3.5 percent, explains
Aaron Ferkinhoff, Loan Officer at Academy Mortgage in Cincinnati, OH.
Similarly, certain cities and towns also provide down-payment assistance for
borrowers who plan to live in their city and earn below a certain income level.
But these programs may be limited to first-time homebuyers, Cook notes.
These loan programs are a just a few
of the options available to borrowers struggling to come up with a down
payment. Make sure to conduct thorough research to ensure you're picking the
right option for your needs.
[Ready to save on your mortgage? Click to compare interest
rates from lenders now.]
Tip - Work with a direct lender or mortgage banker.
Getting a mortgage is an expensive
proposition - and without guidance from a qualified professional you could pay
substantially more than necessary. If you've got financial issues, going to a
regular bank might not be the right solution for you. Instead, you should work
with a direct lender or mortgage banker, says Phil Georgiades, Chief Loan
Steward for VA Home Loan Centers.
Why? Well, if you work with them
directly, mortgage bankers and direct lenders might be able to make exceptions
to some of their guidelines. For example, they might allow a borrower to get a
loan with a higher DTI - perhaps up to 50 percent rather than 43 percent,
according to Anghel.
Direct lenders or mortgage brokers
could also help someone with flawed finances get a loan that a “regular bank”
might not be willing to give, she explains. Banks may only offer a limited
range of loan products, which may not include special loan programs or the
flexible underwriting that you may need.
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