Purchasing a new home can be a stressful process, even under the best of circumstances. For buyers with bad credit, anxiety about finding affordable financing can make the process even more frustrating. However, there are options. These three tips can help you buy your dream home even if your financial record is less than stellar.
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1. Check Your Credit
To determine what your financing options are and how much home you can afford, you need an accurate pictureof your current financial position. Start by checking your credit report with the three major credit bureaus. You are entitled to a free report from each bureau once per year. Review your report for any inaccuracies and negative items.
Next, check your credit score. Most lenders have minimum credit score requirements. The lower your score is, the more difficult and expensive it can be to get approved for a loan. Lenders set their own requirements, but most do not lend to borrowers with scores below 500. If your score is very low, you may need to improve it before you apply for loans. You can increase your score by paying off debt and paying your bills on time.
2. Find Ways To Lower Your Rate
Borrowers with bad credit generally pay higher interest rates than borrowers with good credit. However, there are still ways you can lower your rate. If you need to make a home purchase now before you have time to raise your credit score, consider paying for points on a mortgage.
Mortgage points, also called discount points, are fees the borrower pays to the lender during the closing to obtain a reduced interest rate. In addition to saving you money on interest charges over the life of the loan, this may also lower your monthly payment.
Each point costs 1% of the total mortgage amount. The more money you are borrowing, the more you pay for each point. However, the bigger your loan, the more you also stand to save on interest. The longer you own your home, the more interest you can save, so this option is best for buyers who plan to stay in one place for a while. Use a mortgage calculator to determine how long it will take you to break even and how much you can save on interest versus the cost of the points.
3. Increase Your Down Payment
Lenders don’t just look at your credit score when making a decision. They also consider how much debt and income you have, what your collections history looks like, whether you pay your bills on time, and how much cash you have for a down payment.
The more money you can initially put down on a home, the better off you are financially. First, lenders usually will not loan as much money to borrowers with bad credit, so the more money you have to put down, the more house you can afford. Second, because you will probably be paying a higher interest rate, you should borrow the least amount of money possible to get the home you need. A smaller loan saves you money on your interest payments.
Buying a home with bad credit is a challenge. However, with the right financial strategies it can be done. Follow these tips to help you get the home you’ve been dreaming of.