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Trouble Getting a Home Loan?
How to get approved for a mortgage despite financial hardship

a mortgage checklist

Trouble Getting a Home Loan?
How to get approved for a mortgage despite financial hardship

Maybe your health insurance has a high deductible – one you had to pay because of a recent surgery. Or maybe you didn’t have health insurance in the first place. Either way, the money you tucked away for a down payment on a home is now depleted.

Perhaps you’ve struggled to pay bills on time in recent years in between jobs and now those late payments dot your credit report, resulting in a rating that is less than appealing to lenders. Maybe you’ve even had to declare bankruptcy.

Yes, these are obstacles when it comes to being approved for a mortgage loan. But they can be conquered when home ownership is your goal. Consider these obstacles:

  1. A low credit score/rating – If you have a credit score below 620, getting a traditional home loan is certainly more difficult, even unlikely. For example, a 2016 report showed that just 6% of mortgage borrowers surveyed had scores below 620.[1] And if you are able to secure a traditional loan, you’re likely going to pay a higher interest rate compared to someone with a higher credit rating.
  1. Lacking enough savings for a down payment – Lenders have traditionally sought a 20% down payment on a home loan, but many buyers – especially first-time homebuyers – often put down far less. Some options, such as getting a mortgage through the Federal Housing Administration (FHA), allow borrowers to make a down payment as low as 3.5%.

Finding a good solution

As we touched on above, borrowers with less-than-attractive credit scores, and who don’t have the funds to make a 20% down payment, have options.

  • FHA Loan – If you have a credit rating below 620, or don’t have substantial funds for a down payment, you can apply for a loan through the FHA. For borrowers who qualify, FHA loans allow them to make a down payment of 3.5%. The FHA insures the loans that lenders make, so if a borrower defaults on the loan, FHA pays the lender the amount owed on the home. “If you get an FHA loan for your home, FHA will require you to have mortgage insurance, which is an additional expense added to your loan,” says Alan LaFollete Managing Director, National Mortgage Sales at First National Bank of Omaha. “When you come in and talk to a mortgage loan expert, we can go through all of the details of an FHA loan and other home loan options so you know the requirements.”
  • Department of Veterans Affairs (VA) Home Loans – Eligible veterans, current service members and surviving spouses of service members can apply for a home loan through the VA, which offers loans with no money down for qualified borrowers. In many cases, private mortgage insurance is not required.
  • USDA Home Loans – The U.S. Department of Agriculture created a housing program to help rural development. The USDA rural development loan is a zero-down mortgage for low-to-moderate income families and comes with a lower mortgage insurance premium.[2]

Other options for those with low credit scores

If you have a bad credit rating, there are steps you can take if you are focused on a traditional home loan. Here are a few:

  • Boosting your credit score is the best way to improve your chances of getting a conventional home loan. Start by checking your credit report for any errors or incorrect information.
  • Keeping your credit card utilization under 30% will also help with your credit score. That is, try to keep the amount of credit you have used at any given time under 30%. So, if you have a $10,000 credit card limit, keeping the amount that you have used under $3,000 will help with your credit score.
  • Pay off debt. Debt-to-income ratio is a key factor when lenders determine your ability to pay off a mortgage loan.
  • If you have records of late payments or a pattern of delinquencies on your credit report, your lender may be able to work with you. “If you can explain why those payments were late, and it’s a legitimate reason, then we can often work with you,” says LaFollette. “Just know that having a pattern of late payments on your credit report might result in the lender requiring a higher down payment or a lower debt-to-income ratio. The important thing to remember is that we will work with you to find a home loan that is right for you.”
  • Get a co-signer. This is sometimes another option for borrowers, but it’s not a common alternative. It puts the person who co-signs your loan on the line for repaying the mortgage if you can’t. And that’s not a risk that many are willing to take.

A final thought

“Whether it’s a low credit rating, a lack of funds for a down payment or something else, the place to start is with a mortgage loan officer at your bank. We can help determine the best solution for you when it comes to applying for a loan to buy a home,” says LaFollette. “We’re a partner with you on this journey. Finding solutions is what we do best.”

Got Questions? Stop by your local First National Bank branch today and visit with a mortgage loan expert. Contact one today.

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