Owning your own house may seem like a pipe dream, especially if you’ve got college debt to pay back and a low credit rating. You’re not alone. The average credit scores of Americans ages between 18 and 29 years old is only 652, while 30- to 39-year-olds have an average credit score of 671. Additionally, nearly 21% of Americans have credit ratings below 600.
Qualifying for a mortgage is possible despite a poor credit score. In fact, there are now a variety of options available that don’t all lead to high interest rates or monthly payments.
Shop Around for Mortgage Lenders
There are lenders with programs meant for people with low credit scores and who are willing to help them improve their credit ratings, shares American Loans, a leading Utah-based lender.
A little patience goes a long way. Shopping around for mortgage lenders and comparing their mortgage rates may lead you to a lender with good rates for borrowers with low credit scores. Remember to ask about different interest rates, alternative financing, and options for low credit score holders.
Show Proof of Responsible Rent Payments
A good rent history can help you get approved for a mortgage. In fact, rent payment information is included in credit reports, although less than a percentage of Americans include it in their filings.
You need to submit proof of consistent and timely rent payments for the past year or two to your mortgage lender. If you don’t have official receipts or documents from your landlord, consider investing in alternative credit reporting tools.
Prepare a Large Cash Down Payment
A larger down payment can improve your loan-to-value ratio and improve your chances for a mortgage approval. Twenty percent of the total payment is the recommended amount, as it’s a large enough commitment without having to have private mortgage insurance.
If you opt to borrow from relatives or friends for a substantial down payment, make sure you leave the money in your account for at least two months. It’s also better to have cash reserves on hand or in the bank to show lenders you have funds for emergencies.
While there are ways to work around a low credit score, it’s still best to improve your credit rating while you still can. Request a copy of your credit report at least half a year before you apply for a mortgage. This way, you still have some time to fix possible errors and improve your score.