You’d like to own a home, spent some time window shopping and think you’re ready to take the next step and apply. Just to be on the safe side you pull your credit score and see a three-digit number that starts with a five. Now what?
If you were to ask a reputable lender, he or she would mostly likely tell you to hit the brakes. “Subprime loans are expensive. Interest rates and fees are substantially higher than loans written for more qualified buyers,” says consumer advocate and mortgage broker Alysse Musgrave, who advises her clients to avoid home buying programs designed for those with poor credit. “In addition to increased costs, subprime mortgages often come with unfavorable terms like pre-payment penalties and balloon payments.”
Right now, you may be feeling a rush of emotions: irritation, embarrassment and frustration. But don’t. Putting your plans on pause and focusing instead on credit repair could save you thousands of dollars and plenty of heartache in the long run.
If you can’t bear the thought of waiting and facing higher price tag, mortgage payment and property taxes, seek advice from a trusted lender.
Go Ahead and Apply, Why Don’t You?
It’s hard to know what you don’t know. Even if you have good credit, would your length of employment and current income pass muster? And then there’s the whole down payment dilemma: Do you really need 20 percent? The only way to know for sure is to pay a visit to a trusted lender, perhaps the place where you do most of your banking. “I feel like people should just rip off the Band-Aid and go apply and then figure out what they need to do,” says mortgage expert and author Elysia Stobbe.
Take a Credit Report Deep Dive
Examine your report and pinpoint the causes of your low score. “There are multiple paths to a low credit score,” says credit expert, author and educator John Ulzheimer. Low credit score caused by excessive credit card debt is “actionable,” he says, meaning you can make a few big payments and see improvement in a short period of time. Negative credit information (missed payments, collections, defaults, etc.) is less actionable and may come down to waiting for blemishes to age out and drop off your report. The process may take seven to 10 years, depending on type. “The take away is that you have to be realistic with your expectations,” says Ulzheimer. “There is no silver bullet regardless of what advertisement you might see."
Negative credit information (missed payments, collections, defaults, etc.) is less actionable and may come down to waiting for blemishes to age out and drop off your report.
If credit issues are more complex than paying off debt, evaluate your circumstances. If you can’t bear the thought of waiting and facing a higher price tag, mortgage payment and property taxes, seek advice from a trusted lender, says author and mortgage adviser Casey Fleming. “You need to sit down with a competent mortgage adviser who can help you determine: Is this something we can fix in a month or we can get you into a home with the best loan possible today and then refinance you in a year once you’ve got your credit straightened out.”
Roll Up Your Sleeves and Prepare to Repair
Paying down debt can give your credit score a pretty quick boost, so focus on what you can do to make payments easier — and lower. “Step one is getting organized, making a list of what you owe, to whom, the balances on your debts and the respective interest rates,” says millennial money expert and author Stefanie O'Connell. Step two, she says, is making calls to lenders. “You should be proactive about getting yourself the best deals, calling up and asking for a lower monthly payment or lower interest rate,” she says. “And make a case for yourself: ‘I’ve been paying on time and in full. Is there something we can work out, maybe two percentage points lower, or if I make a higher monthly payment can I get a better interest rate?’ Think of creative ways to make your debt payments more efficient and more cost effective.”
Commit to Minimum Payments or More
Now that you’ve negotiated lower interest rates and monthly payments, you must commit to paying your monthly minimums on time and through the life of the debt. (i.e. until total balance due equals zero). O'Connell also suggests looking for ways to pay more than the minimum. “For example, if I have a credit card with a monthly interest rate of 14 percent, I am going to want to get that payment down really quickly. But if I have a student loan debt with a four percent interest rate, maybe I don’t have to be so aggressive,” she says. “Maybe I can just pay off the minimum each month and invest in other things: retirement, real estate or non-retirement investment accounts. It’s important to consider all of those things.”
Reach Out For Help and Education
Completely perplexed? If you feel overwhelmed by your debt situation, a housing adviser may be the next logical step. “We are enormous fans of home ownership education and one-on-one HUD-approved non-profit housing counselors,” says Anne McCulloch, senior vice president for credit and housing access at Fannie Mae, which offers financial credits to home loan applicants who complete one-on-one counseling or the online Frameworks® program.
Home advisers don’t just help with credit repair strategies and home buying, says McCulloch. Support after purchase is also available. “When buyers are in the home, and life goes sideways — they lose a job or have unexpected expenses — they’ve already built a relationship with a housing counseling agency where they can go for advice and support in managing through whatever financial challenge they’re facing,” she says. “And we think that’s really important. Education, education, education is what I would advise.”