All you ever hear in mortgage financing is that you need perfect credit, right? What if you don’t have perfect credit? Maybe the pandemic took its toll on you and your credit score fell. Are you unable to refinance or get a new mortgage anytime soon?
There is still hope, as long as you have other compensating factors.
Creating Compensating Factors
When lenders look at your application, they look at how likely it is that you will default on your loan. At first glance, a low credit score signals a high risk of default. That’s not good.
But you can offset the lower credit score with other ‘good factors,’ such as:
- Stable employment – Have you been at your job for a long time? Has your income remained steady and/or increased over the years? Lenders like to see consistency and dependability, since your income is what pays the mortgage, this may help.
- Large down payment – Each loan program has a minimum down payment requirement, but nothing holds you back from paying more. If you have more money to put down, go for it. A 20% down payment versus a 5% down payment lowers a lender’s risk of default tremendously.
- Low debt-to-income ratio – Your debt-to-income ratio tells lenders how much of your monthly income is already accounted for. What debts do you already have that will compete with your ability to pay your mortgage? A low debt-to-income ratio increases your chances of paying your mortgage on time, which increases your chances of approval.
Ways to Increase your Credit Score
Even with compensating factors, you should try to boost your credit score as much as possible. Before you apply for a mortgage, figure out why your score is low. You can view your credit report for free here. Go through the report and see what you can fix right away.
While changes typically take a few months to influence your credit score, if you bring your accounts current and take care of any errors, you’ll have a stronger leg to stand on when you apply for a mortgage.
Ways to Increase your Chance of Loan Approval
How else could you increase your chance of loan approval if you have a low credit score?
It comes down to the big picture. Lenders want to see that you’re a low risk of default. A borrower with a low credit score, low down payment, and a history of changing jobs often isn’t a good risk.
A borrower with a low credit score, but a high down payment and stable employment, though, has a higher chance of approval because looking at the big picture, he/she isn’t that large of a risk, especially if there are extenuating circumstances that caused the low credit score.
Talk with us about your situation. Don’t assume your low credit score means no mortgage, as that’s rarely the case. We’ll help you find the mortgage that suits your needs while fitting within your budget during these difficult times.
