When Pensacola home buyers start looking at houses, they may be intimidated at the price. Many fear that their poor credit score will ruin their chance of getting a mortgage that will cover the cost of a new home. While credit scores play a large role in getting a mortgage there are other important factors to consider. If working with a poor credit score concentrate on these four factors that lenders use to determine the risk of a borrower.
Comparing Debt to Income
A credit score is a picture of a person’s current financial standing at that moment in time. It can be changed by working to pay off debts and establish a credit history. A factor that a lender will consider that goes hand and hand with a credit score is a person’s debt-to-income ratio.
The debt-to-income ratio is the comparison of all of their accumulated debt to how much income they are bringing in. When looking at debt this means anything that must be paid monthly. This may be student loans, a current mortgage, car payments, and credit card debt. The income is what a person brings in from all sources like their job or through child support.
To find this ratio take the full amount of debts that are being paid and divide that by the total of any income coming in. A higher ratio will send a red flag to the lender that the borrower may be a higher risk.
Most lenders have a certain percentage they will accept. When talking to a lender they may suggest paying down more debt before getting a mortgage to keep the debt-to-income ratio low once the mortgage is factored in.
Larger Down Payments
There are a slew of options for mortgages that allow borrowers to have smaller down payments. However, if working with a poor credit score, a Pensacola home buyer should bring a larger down payment to the table. Having at least 10% to put down will show lenders that the borrower is able to save large sums of money. Plus, it will decrease the overall amount needed to be borrowed.
Mortgage Choices
With more lenders offering mortgages, there are many choices to look at. Even for those that have a poor credit score, there are a variety of loans to discuss with a lender.
Each loan is going to work for a different borrower. It is important to work with a lender to determine what the best option is.
Looking at a Federal Housing Administration loan is good for anyone that has a credit score that is at least 580. This type of loan allows for a smaller down payment of only three and a half percent, however, it is better if the borrower has more.
Anyone with a credit score lower than the recommended amount will be required to put ten percent down. The only downside is the fact mortgage insurance is required for the entirety of the loan.
An option for a buyer who has served in the military is a VA loan. This type of loan can cover one hundred percent of the value of the property. The credit score is no longer a problem because the loan does not have a minimum needed. However, the lender may have a personal credit score preference. This loan does not need mortgage insurance.
A Helping Hand
Some borrowers need a little more help. Many people ask friends or family to provide them with gift money to use towards the mortgage. This money can be used to secure a higher down payment to persuade the lender that the borrower is less of a risk. There are also down-payment options through the City of Pensacola and the County of Escambia. In Pensacola it’s called SHIP and Bond money through the county.
Always consult a lender about gift money. Any large sums of money transferred close to the date of the mortgage will need to be explained.
Another option is to find someone to co-sign on the loan. A co-signer may have the necessary credit to qualify for the loan. This can help make the loan more secure in the eyes of the lender. In the event the borrower cannot pay the loan the lender will expect the co-signer to step in.
I highly recommend talking with a lender. If you would like recommendations for lenders, please let me know and I’d be happy to put you in contact with a great lender!
