Obtaining a Mortgage Amid Financial Difficulties

It’s no secret that the housing market is hot right now. Demand is high and supply is low, leading to high prices for home buyers. However, in the long term, it’s overwhelmingly a smart financial decision to buy a home as opposed to renting an apartment. Still, individuals sometimes choose to rent because there are certain financial barriers to homeownership, so it can be the easier decision. If you’re looking to make the jump from renter to owner or even upgrading into a new space, but you’re faced with debt, a bad credit score, or just a lack of financial literacy, there are still ways you can overcome this and become a homeowner. It might take some time and education on the home buying process, but it’s an option should you decide to take that step.

Determining your Budget

One of the first steps when looking for a home is to determine your budget. If you’re already in debt, decide how much more you can feasibly take on to meet your mortgage. To do this, your mortgage lender will calculate your debt to income ratio, or your monthly debt payments divided by your monthly gross income. They’ll then evaluate your desired mortgage term, commonly 15 or 30 years, your monthly budget, how much savings you have for a down payment, and factor in other homeowner expenses (such as insurance and fees) to determine how much house you can afford. The lower the debt to income ratio, the more loan options you’ll have available to you, but most lenders won’t approve anything above 50%.

Similar to knowing what you can afford is the mortgage pre-approval process. Most home buyers should and will become pre-approved for a specific rate before making an offer on a home. From there you will be able to choose if you want to go on looking for homes or to tackle some of your financial issues to secure better terms for your mortgage and afford more. Among these factors, there are also others to consider, like current home prices, interest rates, and wages that will also impact affordability.

Credit Score

A credit score is a major factor in purchasing a home and securing a mortgage because it’s a good indicator of your ability to pay your mortgage on time. Generally, you need at least a score of 620 to secure a conventional loan, but you could go as low as 500 with a 10% down FHA loan. Conventional loans are usually preferred by homebuyers because they have the most competitive interest rates and flexible repayment periods ranging from 8 to 30 years. However, if your credit score is struggling, a government-insured loan like a VA loan or FHA loan is a great way to still purchase a home.

Should you have a weak credit score, you can choose to purchase a home with a government-insured loan and aim to refinance later with a stronger credit score. Or, you can work on building good credit now and purchase a home at a later date. To determine your credit score, evaluators look at your length of history, your types of credit, your payment history, and the amount owed. If you have a weak credit score, it’s possible to raise it, but be wary of advertisements for quick fixes because they’re likely scams. One of the most tried and true ways to raise your score is to pay your bill in full when it is due, compared to the minimum payment. Another is to pay off any outstanding credit card debt you have. Finally, you can become an

authorized signer on someone’s credit that has a good credit score, that way you can benefit from their length of credit and payment history without access to a credit card. This is a great way to build credit if you have no experience with it yet.

Debt Consolidation

If your debt to income is high enough that it impedes your ability to secure a mortgage, working on paying down your debt and consolidating it should be a priority. You will need to look closely at what your debts are and the interests on them to create the best plan for paying them completely off or just down enough that your debt to income ratio drops below 50%. One of the ways you can do this is by consolidating your debt into one payment. Look into taking out a low-interest personal loan to pay off any existing debt you have, such as credit card debt, a car payment, student loans, and medical debt. This way, instead of making several payments a month, you’re only making one. You should also try to look for lower interest rates than what your existing loans carry. That way you are paying less overtime comparatively and actively working to lower your debt to income ratio.

Alternatives

If you’re facing financial difficulties, there are still some ways you can secure a mortgage without making immediate changes to your portfolio. One of those options is a co-signer. If you have a partner or parent who is willing to co-sign the mortgage with you, this could help you move into a qualified threshold to receive the mortgage. This would allow you better terms while being able to work on paying down your debts or boosting a credit score. However, this could be a significant risk for the co-signer should you not be able to pay off your mortgage or meet your payment obligations. Make sure this is a person you have a good relationship with and come up with terms of payment that’ll not jeopardize your relationship.

After evaluating all your options, you can decide if now is the right time to purchase a home, or if you have some work to do on your finances before you can get there. Many first-time homebuyers are unaware of the many qualifications it takes to get a mortgage, let alone one with competitive terms. If this is you, there are resources available to help you set and reach your financial goals, like literacy centers and financial empowerment centers. Navigating the housing market can be tough, but working with a trusted REALTOR® will help you now or when you’re ready to purchase.