Financing a Home with Marginal Credit
Do you have a less than perfect credit rating, and are you wondering whether you can purchase your home? First of all, don’t worry about your marginal credit profile. It happens to the best of us. However, it is a good idea to work towards turning your credit history around. In the meantime, it is still advisable to consider purchasing your home, as the money that you are currently spending on renting a home will be diverted into paying off a mortgage.
Credit Ratings and Mortgage Loans
Before we look at the different ways to finance your home, let’s first understand what a credit rating is and how it impacts on your ability to successfully apply for a mortgage.
In a nutshell, a credit rating is an assessment of the creditworthiness of a borrower in general terms or with respect to a particular debt or financial obligation. In other words, as an adult, you have an automatic credit score assigned to you. It is calculated based on your credit history, which is maintained by ratings agencies such as Equifax, Experian, and TransUnion. When you apply for a mortgage or any other form of loan, the financial institution contacts one of more of these agencies and asks for your credit rating.
Why are credit scores necessary?
Banks and financial institutions need to determine their exposure to risk before they lend you any money. The interest rate they offer is also linked to your credit score. The lower your credit score is, the higher your interest rate will be. Therefore, this is the primary reason why individuals, companies, and even countries should make sure that their credit ratings are kept as high as possible.
A mortgage is a legal agreement, secured by the collateral of specified real estate property, which the borrower is obliged to pay back with a predetermined set of payments.
Mortgages are primarily taken out by individuals and businesses to purchase real estate without having to pay the total cost of the asset up front. The borrower will then repay the loan plus interest over a period of up to 30 years, or until he has repaid the total debt and owns the property free and clear. Furthermore, should the borrower repay an additional amount every month, the total interest amount paid will be reduced substantially.
Therefore, it makes total sense that when you are considering taking out a mortgage to pay for your new home, the higher your credit score, the lower you can expect the interest rate on your mortgage to be. Of course, the converse applies as well. You will also more than likely be refused a mortgage if your credit score is too low.
This website, https://texasfha.org, have all the pertinent information you need about a mortgage.
The way to finance your new home with a poor credit score
The good news that, in spite of the fact that you have a poor credit score, there are several options still open for you to finance your purchase:
FHA loan or VA loan
A FHA loan is a mortgage insured by the Federal Housing Administration. If your credit score is too low for a conventional mortgage, then it is a good idea to apply for a FHA loan. The FHA does not actually lend you the money. They insure the loan against default and guarantees that the loan will be repaid to the financial institution. It is important to note that the down payment requirement can be as low as 3.5%.
If you are a military veteran, you are eligible for a VA guaranteed home loan; thus, it is a good idea to investigate all of your options before you make a final decision.
Save, reduce your debt, and increase your credit score
While this option can be seen as a long-term option, it might be worth waiting until you have saved a bigger down payment, reduced your current debt levels, and increased your credit score. This will allow you to apply for a mortgage with a lower interest rate. Your finances will also be more stable so it will be easier for you to repay the monthly installments.
Lease to own agreement
These agreements are difficult to find; however, they are available if you look carefully. In essence, a lease to own agreement is where you have a legal agreement between the owner of the house and the tenant. A predetermined value is set initially. An option fee will be collected by the seller as an act of good faith to buy the house by the tenant. Most of the time, there will be a specified amount that the tenant will pay that’s over and above the regular lease amount. That overage will go towards an escrow account that the tenant can use to reduce the loan amount when the time comes to secure a conventional financing in the future.