Buying a home is an exciting process that takes time, research and money. And for people who need a mortgage, it also usually requires a good credit score. If your credit history is less than what most lenders deem acceptable for a home loan, then it’s time to explore your options.
Although rebuilding your credit is one way to improve your chances of qualifying for a mortgage, it can be a lengthy process. Before you even start the application process, use a mortgage qualification calculator to figure out how much you can afford; this will give you an idea of your price range and how much you’ll need to ask the lender for. Many lenders advise not to spend more than 28 percent of your income on your mortgage.
Some folks might want to own a home sooner — because of attractive real estate prices or a low annual interest rate — than it might take to boost their credit score. Even if you don’t have time to make a helpful boost to your credit score, there are still things you can do to help yourself get a mortgage. Here’s a list of alternative strategies to help you figure out how to buy a house when you don’t meet certain requirements.
1. Increase Qualifying Income
When underwriters look at income, they take a pretty conservative stance. For example, income from your part-time job might not be considered unless you have a history of working more than one job. Rental income might take a 25 percent cut right off the top of your income, and if you deduct business expenses that have yet to be reimbursed on a Schedule 2106, your lender will probably also deduct them from your qualifying income. However, sometimes the rules work in your favor.
As required by the Equal Opportunity Act Amendments of 1976, Public Law 94-239, income that the borrower receives from public assistance programs might be used to qualify for a loan if it can be determined that the income will probably continue for three years or more. This can be helpful in boosting total income.
Here are other sources of income that you might not have considered:
- Alimony or child support
- Automobile allowance
- Boarder income
- Capital gains income
- Disability income — long-term
- Employment offers or contracts
- Employment-related assets as qualifying income
- Foreign income
- Foster-care income
- Interest and dividends income
- Mortgage credit certificates
- Mortgage differential payments income
- Non-occupant borrower income
- Notes receivable income
- Public assistance income
- Retirement, government annuity and pension income
- Royalty payment income
- Social Security income
- Temporary leave income
- Tip income
- Trust income
- Unemployment benefits income
- VA benefits income
2. Choose a Different Mortgage
Some mortgages have more forgiving guidelines than others when it comes to income. VA loans, for example, calculate income two ways — the standard debt-to-income method and the “residual income” method, which is much more generous.
For people with lower incomes, a worthwhile option to look into is Freddie Mac’s Home Possible program. To qualify, the borrower must have a yearly income that’s either equivalent to or less than the area median income for the census tract where the property is located. The only exception to this rule is if the property is in a designated underserved area or high-cost area.
The Home Possible rules state that if the property is in a high-cost area, the annual income can exceed the area median income, within certain limits. Likewise, if the property is in an underserved area, AMI requirements don’t apply at all.
Credit might be another option for people who have a history of paying their bills on time, even if they experienced a period of financial hardship. FHA loan qualifications state that these candidates might still be able to qualify for a loan, regardless of isolated cases of late or slow payments.
3. Bring In a Co-Borrower
There’s always the option of bringing in a co-borrower. Extra income allows you to qualify for a bigger mortgage. Co-borrowers can be occupants or non-occupants. An occupying co-borrower lives in the home with you. A non-occupant co-borrower is more like a co-signer; this person doesn’t live in the house but is responsible for the payments.
Lenders are more likely to put restrictions on non-occupant co-borrower loans, such as requiring a higher down payment. Government loans come with fewer restrictions.
For manually underwritten loans, the income from a non-occupant co-borrower might be considered as acceptable qualifying income. This income can offset certain weaknesses that might be in the occupant borrower’s loan application, such as limited financial reserves or limited credit history.
4. Get a Subprime Mortgage
The term “subprime mortgage” often has a negative connotation because of the housing bubble and financial crisis it’s often associated with; however, subprime mortgages can actually be a gateway to homeownership for some people.
Basically, a subprime mortgage is a home loan with higher interest rates than their prime mortgage counterparts. The higher interest rates are in place to offset the risk of loan default by subprime mortgage borrowers who are risky customers because of poor credit. These mortgages might be either fixed or adjustable rate mortgages.
The benefit of this kind of mortgage is that people with poor credit don’t have to wait as long to own a home. They can repair their credit by paying their mortgage each month, rather than waiting years to repair their credit and then buy a home.
The obvious disadvantage, besides higher rates, is that closing costs and fees associated with home loans will usually be higher for subprime borrowers. Although credit score requirements aren’t as stringent for subprime loans, borrowers must still show proof that they can afford the mortgage payments each month.
5. Strengthen Your Application
It might surprise you to know that income is actually one of the less important underwriting criteria. If you don’t believe it, try calling a few lenders. Tell them you make $1 million a year but have a 500 FICO score and only 5 percent to put down. You won’t get far.
You can build a stronger application by including compensating factors such as:
- History of a low use of debt
- Proof of regular saving habit
- Showing that the home you intend to buy is energy-efficient
- Holding a job with excellent prospects
- Documentation of extra, unofficial income, such as commission income that you haven’t been getting for the required minimum of two years
People with low-to-moderate incomes get mortgages all the time, especially when they have excellent credit, a decent down payment and money in the bank. Establishing great credit and substantial savings are part of the first few steps to buying a house. It also helps to have an emergency fund — enough in the bank to cover two to six months’ worth of bills — and a credit score of 720 or better.
How To: Find Small Home Loans Under $50K
GOBankingRates Staff contributed to the reporting for this article.