The idea of buying a home can be daunting. It can be an even more overwhelming if you have poor credit or a low income. But don’t give up. It may not be out of reach regardless of your current financial situation. There are things you can do to help you along your journey to owning your first or next home.

Five Steps to Home Ownership

1. Check Your Current Credit Score

Your credit rating, FICO score, is one of the most important considerations in qualifying for a home loan. It is based on the tracking and reporting from the three big credit reporting agencies – Equifax, Experian, and TransUnion.

There are several places that allow you to get your FICO credit score for free.

The first place to check for free access to your credit score is with your bank or credit union. These financial institutions typically offer clients access to their FICO credit score within their online banking platform or mobile app. If your bank doesn’t offer that, you can pull your credit report once a year (every 12 months) for free, by visiting AnnualCreditReport.com.

2. Review Your Credit Report for Errors

No one is perfect, including the big three. The reports that make up your credit score are only as good as the data captured. And since your credit score is basically a history of how you’ve handled borrowed money, it’s important to review your credit score and check for any errors.

Correcting errors on your report is an opportunity to raise your score.

Additionally, checking your credit score annually helps you monitor for identity theft, which unfortunately is more and more common in our increasingly digital world.

 3. Check your Debt to Income Ratio (DTI).

The DTI looks at your income compared to your overall debt. If you have a low DTI you’re a safer risk for a lender than that of a person with a higher income and higher DTI.

A lower income is not a deal breaker for mortgage lenders.

The Debt to Income Ratio is as important as your FICO score. Typically, the highest DTI is 43% for most lenders and loan types. Meaning that you should strive to keep your debt to less than 43% of your net income. Having a DTI lower than that implies that the applicant (you) manages their finances well, despite a low-income level.

4. Consider an FHA Loan

An FHA loan is insured by the Federal Housing Administration (hence FHA). These loans have lower credit and down payment requirements.

An FHA-insured mortgage requires just  3.5% down payment and a 580 FICO.

While this truly is a great loan program, it does have its caveats:

  • While the FHA is OK with borrowers having lower credit scores, the mortgage lender can require a higher score.
  • With a traditional mortgage, you can cancel your private mortgage insurance (PMI) once you’ve built up enough equity in your home. However, with an FHA loan, you keep your PMI for the life of your loan.
  • Some sellers don’t like FHA loans. Homes purchased with an FHA loan must meet minimum health and safety standards, meaning that a picky appraiser can push the seller to fix various things before giving approval for the transaction. So instead of lowering the sale price of the home, the seller must fix whatever the issue might be. For this reason, some sellers won’t go under contract with a buyer securing an FHA loan.

5. Rebuild Your Credit

There is the possibility that your credit is so bad you simply will not be approved for a mortgage, no matter your DTI or income level. If that’s the case, you should probably work to rebuild your credit before applying for a mortgage loan. But don’t let this get you down!

Rebuilding your credit isn’t out of reach, or that complicated.

You can start rebuilding your credit by:

  • Paying all your monthly bills on time, every month.
  • Paying down as much of your credit card debt as possible and keep your monthly balances low.
  • Keeping unused credit cards open. If you can avoid using it, keeping your (non-primary) credit card open and unused will most likely increase your credit utilization ratio.
  • Trying to avoid big purchases that require a credit check. Every time your credit score is checked by a store or financial institution (also known as a “hard inquiry”) the inquiry is logged onto your credit score, and too many hard inquiries can negatively affect your score.

The Opportunity for Home Ownership is Yours

Buying a home can create an amazing foundation for your future financial success. While many renters assume that they will never get to a place to save up enough money to purchase a home, that is simply not the case.

Beyond what we’ve talked about in this article, there are many federal, state, and city programs available to help community members achieve home ownership. If you live in Colorado, you can click here for a list of agencies available to help.

If you’re ready to start talking about home ownership, contact one of our lenders today.