How to buy a home in a hot market with below-average credit
A hot market is a seller's market. In many parts of the country, housing inventory is low and prices are rising.
If you're thinking about buying a home but unsure whether you'll qualify based on your credit score, you're in luck. It is possible to buy a home with less than stellar credit. Here's how.
Know your credit report
Order a copy of your credit report from each of the three major credit bureaus. This will give you a chance to fix any errors and see if there are things you can do to improve your credit score.
Many mortgage lenders are also willing to consider alternative credit data for a mortgage application. If you currently rent, you can coordinate with your landlord to report your rent payments to the credit bureaus. Or you may be able to opt in to an alternative credit score that considers your banking data, cell phone, or utility bills.
Get your finances in order
Being financially ready will help you to get the loan and land the deal. Keep the following in mind:
Your debt to income (DTI) represents how much of your gross (before taxes) income goes to debt payments. Although you can get a mortgage with a DTI of 50% and even higher, it's in your best interests to bring this number down. The less money you spend on other debts each month, the more you can afford to spend on a home. But if you have a lot of debt, you may need to shop for a home with a lower price tag.
Earnest money is a non-refundable deposit that tells the seller your offer is serious. Offering a high earnest money deposit is a way to get cash into the seller's hands sooner, which may help you win a bidding war.
So be ready to plop down a cash deposit when your offer is accepted. This isn't technically your down payment, but it's also not an additional expense. Later on, it will count toward your closing costs -- including your down payment.
There's a difference between mortgage pre-approval vs. pre-qualification.
Pre-qualification is a "probably." But pre-approval is a commitment from the lender that states your financial information has been verified and you will receive the loan, so long as nothing changes to affect your eligibility before the loan closes.
This is your chance to shop for a mortgage. Submit applications for pre-approval with two or three lenders so you can check mortgage rates and compare offers.
This is also when you'll find out what loan programs you qualify for. If your credit score is below 620, you may not qualify for a conventional loan. Conventional loans are not insured by the federal government and tend to have stricter requirements.
You still have other mortgage options, including:
The FHA loan, for example, requires a score of just 580 with a 3.5% down payment. You can have a score as low as 500 with a 10% down payment.
Some lenders have higher credit score requirements, even for FHA loans. However, most lenders are willing to be flexible on credit score requirements if you come to the table with a bigger down payment and/or a low DTI.
Since you're starting with a lower credit score, take care to protect it. Do your loan shopping within a two-week period. Otherwise, each new application could cause your score to fall even more.
In a seller's market, you may not be able to land the home of your dreams. So give yourself room to be flexible. Make a short list of non-negotiable home features and consider the rest to be icing on the cake. If you find something at the right price that meets most of your needs, make your move.
This is where it helps to work with a real estate agent. Real estate trends can vary widely from one city to another. In a hot market, some listings go under contract within a few days of listing.
Prepare for a bidding war
In some hot real estate markets, homes regularly sell for more than the listing price. Sometimes considerably more. As such, you may find yourself in a bidding war. Decide ahead of time the maximum you can afford to spend. Don't forget to factor in remodeling or improvement costs. Make sure to stay within your financial comfort zone, even in a bidding war.
Think about cutting contingencies
Contingencies say that the purchase agreement is conditional. In a hot market, because sellers are likely to get multiple offers, they may not be willing to agree to any contingencies. Instead, some sellers will move straight to an offer that has no conditions whatsoever.
This issue can be tricky for the average family to navigate. You don't want to find yourself legally obligated to buy a home in the event you change your mind and decide to back out of a home purchase agreement.
But if you decide to go this route, there are a number of contingencies you can eliminate to make yourself a more competitive buyer, including:
- Home inspection
- Home sale
The good news is that a lower credit score is not a barrier to home ownership. In fact, only half of American adults have good credit (or better). Mortgage loan programs already exist to accommodate these buyers. So if you're ready to buy a home, connect with a Residential Lender at FirstMidwest.com/Mortgage and don't forget to have fun shopping.