By David Pilley on August 30, 2010
.jpg.aspx?width=75&height=75) Owning a home can say a lot about one’s character. It may show you are an independent, self-reliant individual who is making an honest living. If you are married with children, your home can be an example of your ability to supply and take care of your family. If you are responsible with money, chances are you might have a nicer home than someone who is often late with payments. It’s true that people with poor credit are turned down more often for a mortgage loan. However, it’s not impossible to get a loan and own a home with a low FICO score.
Applying for a mortgage with poor credit is just like applying for any other loan. The lender will take a look at your credit report, your income, your employment, and your debt. In obtaining a mortgage loan, however, available cash is another important factor, one that can help you if you have a poor credit score. When you obtain a mortgage loan for your home, you will need to make a down payment (an upfront portion of the loan, given in cash). A down payment usually ranges between 5% and 30% of the total loan, and lenders like seeing a higher down payment (20% or more) because it shows you have a lot invested in the property. If you have poor credit, you can still get a home if you have available cash to make a down payment.
It is possible your credit score is low because you simply don’t have much of a credit history. If you need help showing proof you are trustworthy with money, give your lender copies of canceled checks that show timely payment of nontraditional credit, such as student loans, utilities, or even your phone bill.
Since the lender looks at your financial situation, you need to be well aware of what you have, what you make, and how you are spending it. Make sure you have a reasonable debt-to-income ratio. (And make sure your income is steady.) An ideal debt-to-income ratio for making a monthly mortgage payment should be no more than 30%.
On what type of home to buy, consider looking at an existing home rather than a recently built home. Older homes cost less per square foot than newer homes, and you can save an incredible amount of money here. Older homes might need repairs, though, so keep this in mind in your search for a home. (If you have experience in home construction, kudos to you.)
Finally, on what type of mortgage to get, it is extremely risky to get a subprime loan. These loans can have volatile interest rates, and the last thing you want to do with poor credit is default on a mortgage. If you think your financial situation will improve in the future, you could consider an adjustable rate mortgage, where your interest rate starts low but goes up after a few years. Your best option may be to get a fixed rate mortgage. Here, your interest rate is constant, and you don’t need to worry about changing numbers in your formula for paying the mortgage. You might not be able to obtain your dream home with poor credit, but you can still get an affordable home that suits you and your means.
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