Are you asking yourself, “Should I refinance my mortgage?” or “Should I take a loan and buy a house?” If you want to qualify for a loan from a bank, you need four things:
1. Proof that you have the money for the down payment
2. Proof that you have stable income
3. A good credit score
4. Monthly income that is at least three times the mortgage payment
If you don’t have each of these items, you can (possibly) still get a loan, but it will cost you more – possibly a lot more. You’ll have to pay higher interest because banks consider you a greater risk.
Personally, I recommend not buying real estate now if you really can’t afford it. I know that prices and interest rates are very low right now, but you do not want to get in over your head. Many people did that five years ago and are facing bankruptcy now as a result.
Assuming I haven’t talked you out of it, if you are still dead-set on buying real estate and you don’t have the four requirements now, getting a mortgage with bad credit isn’t impossible. Let’s take a look at what you need to do.
1. Down Payment
If someone is gifting you the money for your down payment, get it into your name now. My experience is that the banks look back 90 days to make sure the money has been there for a little while. The sooner you deposit that money, the sooner the clock starts ticking.
2. Stable Income
This is tough to manage. Either you have a stable job history or you don’t. Having said that, now isn’t the time to tell the boss what you really think about him. If you’re on the fence about your job, try to suck it up and hang in there…at least until your loan gets approved.
3. Improve Your Credit Score
Do everything you can to improve your credit score now. I’ve written about this extensively. Get down to business. It isn’t that tough, and it doesn’t take that long to boost that score.
If you are interested, you can get a free credit score with no credit card required.
4. Monthly Income
If you don’t have the income to justify a loan, my advice is simple. Either start looking for less expensive homes, or get a weekend job. Again, do not under any circumstances get in over your head. You want a loan you can afford to pay, not a loan that is going to choke you. That will add undo pressure at home, and you’ll be miserable. It isn’t worth it. Believe me, I’ve seen this in real time and it’s not pretty.
5. Mortgage Brokers
I would look for a good mortgage broker, but they aren’t easy to find. Interview at least three and ask tons of questions. Get referrals from friends, but don’t rely blindly on that. Ask your questions anyway. As a matter of principle, I never work with anyone who pressures me, and this goes for mortgage brokers as well. Sure, interest rates are low right now. And there certainly is a chance they’ll be going up. But that’s no reason to act out of fear or pressure. If you spend a few extra weeks and make sure you’re working with the right person, that will more than make up for any increase in rates that may (or may not) manifest.
6. Take Advantage of the Current Market
Prices are low, and many sellers are desperate to sell. You might come across a few that are willing to finance part or all of the purchase for you. This could be a huge savings in cost, time and interest rate. Don’t ignore this opportunity to ask for seller financing.
7. Partner Up
If you can’t qualify for a good loan, get a very close friend or family member to co-sign the loan or become a joint owner. The co-sign option exposes your partner to risk. If you fail to pay, they will have to pay or suffer dings on their credit report. They may prefer to buy the property themselves and then lease it to you with option to buy. This might help you buy time until you can qualify yourself.
If you take these 7 steps you’ll be doing everything you can to qualify for the best loan possible and take advantage of low real estate prices now. But remember, a bargain isn’t a bargain if you can’t afford it. Don’t sweat it. Wait until you can safely afford any financial obligation you take on.
What other steps should we take to qualify for a loan?
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{ 3 comments… read them below or add one }
Hi Neal,
Thanks for the great article. I’d like to get your advice on an issue that I can’t seem to find much discussion on.
I’m a 25 year old young professional, who is currently renting. If I had to guess, I will probably rent until I get married, and I will likely have 20% saved up for a down payment on a house, a good credit score, and a stable income. My question is dealing with the monthly income relative to the mortgage payments.
Obviously with a working spouse, we’d be able to afford a much larger mortgage payment, but I assume that we’d have kids in the future. I’d hope that with promotions and raises that we would be able to afford the payments on one income for multiple years, but I wouldn’t want to stretch myself too thin. How would you advise young clients planning to buy, who could easily afford the mortgage payments with a dual income, but may have difficulty on just one income in the future if they were to start a family?
Mark — great question. Let me ponder. I’ll write a post on this one in the next week or two. Fair enough?
Much appreciated!