Buying a house today can be rather difficult. You might have even heard that there are factors out there that can affect the success of your application for a mortgage.
One of these is your credit score. Truth be told, even people with average credit scores have a 50/50 chance of getting their mortgage applications rejected. So what does this imply for people with low credit scores? Will having a low credit score prevent you from getting a mortgage?
The answer is no but that doesn’t mean you should get too reckless with applying for mortgages, either. There is a way to get a mortgage even with a low score but it’s going to be a rather difficult and demanding process.
You might have heard that low credit scores can affect a lot of non-credit transactions that you can make. This includes applying for a job or looking for an apartment to rent. It can even include purchasing something large like a car or a boat.
To that effect, people with high credit scores should have no problems convincing that lender/landlord/employer that they are worth a try while those with lower scores are at risk of getting rejected.
Why is this so? It all boils down to the word “risk”. You have to keep in mind that these people see all applications being submitted to them as investment opportunities. For an employer, an applicant is a potential asset that they can train. For a lender, every lendee provides for an opportunity to let their money grow.
Also, there is the fact that a credit score usually works as merely a reference to the buyer. It does not have any sanction of sorts which compels a person to outright reject their application. It simply tells a lender that you are a riskier person to loan money to.
As such, there is nothing out there that states that your credit score will be the sole factor in determining risk. It’s still up to the lender whether they are going to deal with the risk of doing business with you given your track record.
On the flip side, that lender is still going to get their investment from you, not just in a way that is quick or easy. This means that approving your mortgage will require certain restrictions. As far as mortgages go, this will come in one form which will be discussed later on.
In order for lenders to consider you as a subprime borrower, having a low credit score is not enough. Your credit score has to contain certain derogatory remarks which will include:
Also, it is important that what creditors consider to be “low” does not exactly mean the poor to very poor range in any credit score hierarchy. Even average to above average scores can also have a difficult application processes.
For instance, even if your score from Experian is at 680, there is still a chance that your mortgage application is going to get approved but with certain strict conditions.
To mitigate most of the risks from doing business with people with low credit scores, lenders often charge them with interest rates higher than the norm. The reason for this is quite simple: if you are given a high interest rate, you’d be compelled to settle that debt sooner or later. In essence, the lender gets to earn a lot from their investment. You’d also be forced to develop better financial management skills.
Here’s the twist, however: Mortgages are known for their long payment rates. Normally, they’d go at least 10 years or as much as 30 years.
So, if you have a low credit score, you’ll be given a high interest rate. That means you would be spending what is practically a lifetime paying more for the interest and less for the principal amount.
The best way to ensure that you don’t have to deal with high interest rates for your mortgage is to reduce your risk as an investment. Before you apply for a mortgage, you should always make it a habit to request for a credit report from your credit reporting agency of choice.
Within a few working days, you should be given a copy of your last credit report. The details there will tell you which data might potentially affect your application.
If you think that your credit report is good then there’s no stopping you from submitting your mortgage application. However, if you think that the score needs a bit of an improvement, it’s best to postpone that application. Focus on making some improvements in the way you handle your credit.
Here are some ways that you can improve on your rating.
A. Make Your Payments on Time
Every on-time payment you make will be reported to your credit reporting agency, improving your score. However, it’s not only timeliness that will get your score up but also frequency. The more payments you make to lower your balance within a month, the more points your score will move up.
If possible, don’t add another entry to your list of creditors before you make your mortgage. This just gives the lender the notion that your attention would be split between two responsibilities. However, if you cannot avoid applying for credit before your mortgage, make sure that a large portion of that debt gets paid before you submit your applications.
You’d have to understand that your credit report is not as infallible as you might think it is. There might be errors in your entry that lead to a poor score. If you think that something is wrong with the report, notify the agency and submit any document that supports your claim.
If verified, your score will be adjusted and you’d be given a copy of your amended credit report for free.
If there is a sense of urgency in your mortgage application, there are several alternatives that you can opt for.,
Believe it or not, not all mortgage lenders out there trust credit scores fully. They’d rather assess each applicant in person and make a decision based on their current situation.
Some lenders who use scoring actually employ programs that automatically reject an application or assign a high interest rates to an applicant regardless of their current needs and predicament.
With a bad credit score, most of your loan options are going to be limited. However, that’s only for mainstream lenders. There are actually specialist lenders out there that can give you a mortgage for prices that adjusted based on the element of risk.
Simply put, you are going to get a mortgage with a high interest rate from the start. However, once your financial situation has improved, that lender might become open for adjustments to your rate.
This option is actually quite perfect for mortgage applicants who need funding as quickly as possible. The flexible rate allows you to renegotiate your payments once everything gets better for you.
So can you apply for a mortgage even if your credit score leaves a lot to be desired? Yes. But should you? The answer is no. Just because you can apply for a mortgage even if your score is low does not mean that you should start submitting applications ASAP.
The best course of action here is to improve your standing with the credit reporting agencies first before you apply for mortgage.If a mortgage is in while you are still fixing your credit score, then there’s no harm in trying out non-mainstream options.
Either way, you have to make sure that you have the means to meet the demands of this decades-long contract if you want to make the most out of it.
Have you ever tried applying for mortgage before? What other factors do you think will affect interest rates for your mortgage? Let us know in the comments below.