You Don’t Have to Have Perfect Credit Score to Qualify for a Home Loan

Purchasing a home is something American’s strive for, but for those who have less than the perfect credit score, it is often assumed that their options are limited. As you go through life, chances are you will experience a few credit issues along the way.

The good news is, you don’t have to have perfect credit to qualify for a home loan. There are many common misconceptions that surround the mortgage lending process. There is more involved with qualifying for a home loan than just your credit score, although that is certainly one of the considerations.

Whether you are a first-time home buyer or you currently own a home, but haven’t applied for a loan in several years, understanding what you need to have in place to qualify is crucial to the mortgage lending process. Even with a less than perfect credit score you can still qualify for a mortgage.

What a Mortgage Lender Looks At

Your credit score is a determining factor to the mortgage lending process, but you don’t need perfect credit to qualify. Lenders will take into account your debt-to-income ratio, the amount you intend to borrow, and the value of the home you want to purchase. Your debt-to-income ratio is your fixed expenses combined with your new mortgage compared to your gross monthly income. Lenders will also look at your current debts, credit card accounts and assets.

Mortgage lenders will look at how well you can pay off your debts. If you have a good history of paying off debts, the easier it will be to qualify for a home loan, even with a low credit score. Not making loan or credit card payments on time can be seen as a red flag by mortgage lenders. It indicates an inability to manage your finances. Paying off debts in a timely and consistent manner can significantly increase your chances of qualifying for a home loan.

Equity and Down Payments

One of the most common myths that come out of the mortgage lending process is that you need a large down payment or equity to qualify for a home loan, 20 percent or more of the purchase price. The reality is, the minimum requirement for a home loan down payment is typically 3.5 percent of the sales price. This down payment percentage is what you will need to qualify for a FHA loan. A FHA loan is a good option for those who are first-time home buyers. Even with less than perfect credit, you don’t have to come up with a large down payment to qualify for a mortgage. Another benefit of a FHA loan is that borrowers are not penalized with a higher interest rate, even with a few credit hiccups.

Other lending options include a conventional home loan. Conventional home loans traditionally require 5 to 10 percent down, depending on your lender. However, on approved credit, you may also qualify for 3 percent down with a conventional home loan. Another aspect to keep in mind when applying for a home loan is, in addition to the down payment, you will also need funds for closing fees. The upside to this is home loan programs can help pay these fees and more. Your mortgage lender can explain to you how this works.

Credit Needs to Qualify for a Mortgage

It’s no secret that if you have a good credit history and a low debt-to-income ratio you will qualify for the best mortgage rates, but you can still qualify for a home loan with less than perfect credit. Qualifying for home loans with poor credit often comes with a higher interest rate and costs, so keeping your credit in good standing is always the best route to ensuring you are ready to purchase a home. If you are planning on applying for a home loan, it is a good idea to work on your credit before you go forward with the home lending process. If you can make a few adjustments to pull your credit score up, even a little bit, you will find better options for lending.

So how do you work on raising your credit score? Start with making all of your credit card payments on time. If you can pay off your outstanding credit card balances, yet keep your credit card accounts open when they are paid off, it can significantly increase your credit score. Using your credit cards for small purchases and paying off balances on time and immediately after the purchase will go a long way with towards improving your credit score. Paying off any debts is another way to help increase your credit score. Raising your credit score takes time, but much like owning a home, it will be worth the effort in the long run.

To find out more information about the mortgage lending process, visit with the trusted lenders at Galaxy Lending Group to understand your options, and to work with a specialized mortgage professional.