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With rental rates reaching an all time high, you might be thinking it’s time to buy.  You have been saving money for a down payment but your credit score isn’t quite where you need it to be.  Can you still buy?

Lenders consider four primary factors when reviewing a mortgage application:

1. Your credit score.

2. The amount of debt you carry compared to the income you receive, also called your debt-to-income ratio or DTI.

3. Your employment history.

4. The size of your down payment.

Two or three positive factors might outweigh a negative one. Here's what you can do to improve each of them and bolster your chances of getting approved for a mortgage.

1. Credit score

Your credit score can determine what types of home loans you're eligible for, how high of an interest rate you'll be offered and how large of a down payment you have to make.

Though you may be able to qualify for a mortgage with a credit score that's as low as 500, you would need to be able to make a 10% down payment — and you probably wouldn't get a great interest rate.

Improving your credit takes time, but a higher score can help you start off your home loan on better terms, saving you money in the long run.

2. Debt-to-income ratio

To calculate your debt-to-income ratio, or DTI, a lender will divide the total of your monthly debt obligations (things like car payments or student loans) by your monthly pretax income.

Most lenders will look for a DTI that's 36% or lower. A lender that qualifies you with a higher DTI is probably charging you a higher interest rate.

You can lower your DTI by paying down existing debts. While you're getting ready to buy a house, and during the homebuying process, you should avoid taking on any additional debts or making any major purchases.

3. Employment history

You can't change your employment history, but you can do your best to make sure your employment status is steady before you begin applying for mortgages. If you change jobs during the underwriting period, it can impact how much a lender is willing to loan you.

4. Down payment

The amount of down payment you'll need depends on what type of home loan you're getting. If you are affiliated with the military, you may be able to qualify for a mortgage backed by the Department of Veterans Affairs. VA loans allow zero down payment. USDA loans, which are insured by the U.S. Department of Agriculture and meant to help lower-income borrowers living outside of urban areas, also have no down payment requirement.

Loans backed by the Federal Housing Administration can be beneficial to borrowers with lower credit scores because FHA loans tend to allow lower minimum credit scores. If your credit score is at least 580, you may be able to make a down payment that is as low as 3.5%. FHA loans also allow borrowers to use gift money to go toward the down payment.

If you are able to make a higher down payment, that may help offset a lower credit score in the eyes of your lender. State-sponsored first-time home buyer programs offer down payment assistance and grants that can enhance your borrowing power.

The bottom line? Shop around. You may qualify for a home loan with some lenders but not others, and you'll want to compare the different offers. Look closely at the rates, fees and other requirements to see which mortgage lender is offering you the best deal.  Once you get that pre-approval, give us a call, we would love to help you find your dream home!

 

Evduza Ramaj, Inside Realty