While your credit score is an important factor in being approved for a loan, other factors also are involved when it comes to determining your ability to afford to buy a home. If your credit score leaves something to be desired, Forbes suggests looking at these four factors that can help to achieve your dream of becoming a homeowner.
1. Debt-to-income ratio
Lenders examine your debt-to-income ratio (DTI) when deciding whether or not to approve you for a loan. This ratio is the sum of all your monthly debt payments (including credit card debt, car payments, student loans, etc.) divided by your total monthly income, and lenders typically look for a ratio of 50 percent or less.
First, you’ll want to determine your current ratio by adding up all your debts and then dividing the total by the sum of all your monthly income streams. If your ratio is higher than you’d like it to be, there are two options to improve it: generating more income through a second job or allocating more of your current income to pay down your debts.
Before you begin deciding how to tackle your DTI, however, your best bet is to talk to your lender. He or she will be able to look at the particulars of your financials to help you zero in on the money moves that will make the greatest impact.
2. Down payment
Buying with bad credit often means looking for ways to reassure the lender that you’re a risk worth taking by proving you’re capable of paying back the money you’re borrowing. One way to do that is by bringing a larger-than-normal down payment to the table.
While most loans only require you to put down 3-5 percent, you should aim to have a down payment of at least 10 percent. This reassures lenders for two reasons: It shows you have the ability to save large sums of money, which often indicates financial responsibility, and reduces the overall amount of funds you need to borrow. The result? Lenders view you as less of a risk.
3. Loan options
Individuals with less-than-perfect credit can find loan options that specifically cater to those with a lower score. Your lender may know of additional options that are unique to your area, the most common ones are:
- Guaranteed by the Federal Housing Administration
- If you have a score of 580 or higher, you qualify to put down as little as 3.5 percent
- If you have a score of 500-580, you still can qualify for the loan, but you need to put down at least 10 percent
- You need to pay mortgage insurance over the life of the loan
- You must have performed military service or be a military spouse to be eligible
- You can finance up to 100 percent of the property’s value
- There is no minimum credit score requirement—it’s up to the individual lender to decide
- This loan does not require mortgage insurance
4. Family and friends
Buying with bad credit often comes down to asking for a little help from family or close friends. Here are two ways that they can assist you in your goal of becoming a homeowner:
Consider using gift money
Maybe your parents are financially capable of and generous enough to be able to help you with your down payment, or maybe your grandparents have been putting money aside for you since you were born. Either way, it is possible to use funds given to you to purchase a home.
This is known as receiving gift money. Before you can accept any funds, however, talk to a lender to get help documenting the transfer of funds so they aren’t called into question during the underwriting process.
Get a co-signer
If you’re truly unable to qualify for a loan on your own, you may be able to do so with the help of a co-signer. A co-signer is someone (usually a primary family member) who has good financial standing and can provide some peace of mind to the lender.
The co-signer essentially agrees to take care of the loan if you stop paying or are unable to continue making payments.