In “Securing a Home Loan with Bad Credit – Part I” we explored mitigating factors borrowers should consider highlighting when it comes to securing a home loan even when you have bad credit. In addition to highlighting the financial assets you do have, your job security and proving your self-discipline as a saver rather than a spender, there are four other factors you should also highlight.
One of these factors is demonstrating a willingness to live in the area for the long-term. You want to show lenders that you’re not a flight risk. One way to show this is to list how long you’ve lived at your current residence, especially if the length of time has been three years or longer. However, if this time was spent living in your parents’ basement, this may not go over so well, unless the home you are interested in buying is located down the street from your parents. This would demonstrate you have strong ties to the community which can help.
Another way you can secure a home loan with bad credit is to increase your down payment. The days of zero down payments are pretty much over and these days the larger the down payment, the quicker the home loan approval. Probably the biggest hurdle to purchasing a home is coming up with enough money for the down payment and closing costs. What a lot of people don’t know is that there are down-payment assistance programs, state and local municipality programs that can help. If you fall into this situation, be sure to check with your city for possible homebuyer assistance.
Starting out smaller than you want is another way to secure a home loan with bad credit. This is difficult, especially when you have friends and sometimes real estate agents or brokers telling you that you can afford more. By taking your time and doing the research necessary to get a good understanding of the home prices in your preferred area, you’ll make a smart buy when the right house comes along. There’s nothing wrong with a starter home that’s smaller than your dream home and you can always move up later. The last thing you want to do is move into a house you can’t afford, lose it and find yourself in more bad credit later.
Finally, telling home loan lenders you’ve never been late on your rent or child support payments is a lot different than proving it on paper. Before you apply for a loan, gather documentation to back up all the items you’ve listed on your compensating factors list. You should have bank statements that show regular deposits of income or retirement contribution and copies of cancelled checks. Merely providing a letter from your landlord that says you paid all of your rent on time isn’t going to cut it. When you can’t produce documents like these, doubts are raised about your credit history.
Mortgage lenders have their eyes open for certain red flags. If you’re looking to secure a home loan and have bad credit, the best thing you can do is highlight the positive aspects of your financial profile.