Low Credit Score: Here Are Compensating Factors for Your Loan

Your credit score is cumulative of most of your financial decisions. Unfortunately, it is easy to make seemingly trivial mistakes with your finances, which will significantly lower your credit score. Most people only realize the impact of their financial errors when applying for a home loan. Those who already know their credit score is low, on the other hand, avoid applying for a mortgage altogether.

A low credit score, however, should not be a reason for you not to send your application to a mortgage company in Portland. This is because there are some loans designed explicitly for homebuyers with less-than-optimal credit scores. These include the Federal Housing Administration (FHA), US Department of Agriculture (USDA) and Veteran Affairs (VA) home loans.

Other than these loan options, there are various factors that will increase your odds of mortgage approval and reduce the loan’s risk to your lender even with a poor credit rating. These are called compensation factors. The following are a few of them.

Large Down Payment

A down payment of more than 10% of a home’s cost is one of the most profitable compensating factors. It seems hard to come up with such a significant sum for your down payment. But you can start saving early for this down payment so that you have the money upfront. This will not only increase your probability of loan approval, but you will also get lower monthly repayments.

Rental Verification

Rental verification for one or two years before your mortgage application can also boost your approval chances. This will prove that you can meet your monthly mortgage repayments, more so if the rent is higher than your expected home loan repayments. Rental verification will only be valid for your application if you have proof of bank statements or checks to your landlord.

Low DTI Ratio

Your debt-to-income (DTI) ratio denotes your loans’ amount vis-à-vis your income. The ideal choice is to have a low DTI ratio since this means your income is higher than your debts. Most lenders will consider a DTI of not more than 5% a strong compensating factor. To guarantee you get this ratio, you should aim to pay off as many debts as you can before applying for a home loan.

Accumulated Savings

Man depositing money to bank

Other than the saving towards your down payment, you should start a savings account. This will make an influential compensating factor in your mortgage application since it shows your lender that you have become financially responsible and are eager to save. Mutual fund investment, certificate of deposit and investment accounts are some of the best accounts to open.

You can do only so much to reverse the financial mistakes that have contributed to your low credit rating. But these errors should not be a stumbling block to your homeownership journey. The above compensating factors are designed to redeem your financial image to lenders and boost your chances of approval and reasonable rates. Other than these factors, you should also try not to change jobs frequently a few years before your mortgage application.

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