With the housing market improving considerably over the last year, many Americans are now considering getting back into the market for the first time in a while. The problem many might have, though, is that lending standards are still fairly tight, and some consumers may have credit scores that are somewhat less than ideal.
This can obviously create fairly serious issues for those who have all their financial ducks in a row when it comes to preparing to buy a house, but whose credit scores might still be a little lacking, often as a result of mistakes made in the more distant past. Fortunately, there are ways for otherwise qualified Americans to obtain the home loans they may be seeking, and all it may take is s little shrewdness.
Where borrowers with lower credit scores can turn
When seeking a mortgage, borrowers who have diminished credit standings can occasionally become discouraged because it is still difficult for even those with good — but not great — credit scores to find approval from lenders. However, if they seek their home loans through the Federal Housing Administration, their chances for approval are likely to skyrocket.
The FHA has mortgages that are specifically designed to help consumers with strong financials but lower credit ratings, as their minimum credit score requirement for them can be as low as 500, though lenders putting up the money for these mortgages may put slightly higher limits in place as a means of protecting themselves from riskier investments, which they consider those with lower scores to necessarily be. But these loans will also come with extremely low requirements for down payments levels, which may make it easier to afford. However, it should be noted that the stronger borrowers make themselves look in other ways, the better off they will likely be when it comes to obtaining approval.
In general, the best preparations for the mortgage application process is making sure to have a down payment in place that's worth 20 percent or more of a home's value, as the higher the initial payment is, the less risk there is for the lender going forward. This will also help to improve the loan to value ratio, because the more that's paid up front, the lower the total cost of the financing itself. Further, hopeful borrowers should make sure that they've reduced their debts dramatically.
One of the most important things lenders consider in the home loan application process is what is know as a borrower's debt-to-income ratio, and as the name implies, it weighs the amount of outstanding balances being paid down every month versus what is being brought in as salary. Lenders generally like to see such a ratio around the one-third range, as this will help borrowers to better avoid any potential problems in dealing with their bills when a financial emergency arises, as they often can. Borrowers with any more debt than that (with respect to their salaries) will likely have a more difficult time obtaining approval.
Some steps may improve credit as well
Of course, cutting into debts is something that will not only improve one's debt-to-income ratio, but will also cause a step forward in their credit ratings as well. The amount of money people owe versus their total allowable credit limits makes up a full 30 percent of their credit scores, and as such, steps to repair the one will itself necessarily improve the other. This, then, will improve a person's chances of being approved for credit doubly so, as it will make them more attractive to lenders on both fronts.
Meanwhile, borrowers who get their finances in order ahead of an application will likely have the financial wherewithal to better deal with their monthly bills, and avoid late fees and penalty interest payments. This, too, will likely serve to improve a borrower's credit standing, as the ability to make payments on time and in full every month accounts for another 35 percent of one's score, making it the single largest determining factor for a rating. That will consequently put them in a better position to be approved for the mortgages they're seeking.
Finally, before applying for any sort of financing, consumers should always take the time to order copies of their credit reports to see where they stand. However, when doing this, they should also take the time to ensure there are no unfair markings on these documents which may be marring their otherwise strong standings. If any such entries are discovered, borrowers might want to consider the benefits of working with a credit repair law firm which may be able to help them in correcting the issues as quickly as possible.