Although COVID has had a significant effect on a lot of industries, the one thing that has appeared to weather the storm and to thrive amid the chaos is real estate. As we head into the second half of 2021, many housing markets are still red-hot, inventory is at an all-time low, interest rates remain historically low, and conditions are likely to continue well into the holidays with a seller’s market in full swing. When it comes to purchasing a home, never has time been so of the essence. That is why having a South Carolina mortgage lender’s approval is so critical before you even put a bid in. But what if your client’s credit rating isn’t stellar? Are there ways to work around a difficult borrower profile?
Find a Cosigner
If the biggest hurdle is that your client’s income isn’t high enough, a cosigner might help because their income can be taken into account when lenders do a debt-to-income ratio. The cosigner doesn’t have to reside with the borrower; if they promise to help guarantee monthly payments, then the bank will use their income in the equation. But a cosigner has to have a good credit score, stable employment, and proof of steady income.
The cosigner needs to understand that if the borrower defaults, they can be held liable. Also, if the borrower misses a payment or makes a late one, that can affect the cosigner’s credit rating. It is never a good idea to add a cosigner if your borrower doesn’t have the income to afford the mortgage. A cosigner should just be additional insurance, not a cover-up for someone who can’t afford a mortgage that is too high.
Boost Your Credit Score
Credit scores really are so vital when you want to borrow money, so taking steps to raise your score can only help. Whether you haven’t yet established a stable credit history, you have too much debt, or you have a poor history of payments, there are effective ways to boost your score.
Build a Credit History
Not having any credit history is as bad as having a less-than-good history. If you are a first-time buyer without an extensive credit background, consider opening a secured credit card that has a small credit limit. A secured card is only issued if you have the cash to back up the credit card’s available credit limit, which eliminates the credit issuer’s risk. Make sure that you pay off the entire balance every month and don’t have a revolving balance in order to boost your score the fastest.
Manage Credit Cards
Making payments on time is critical to your overall credit rating. Also, since debt-to-income is a big part of the calculation, make sure to pay down your cards as much as you can. The lower the percentage of used credit versus available credit, the better. Although paying them down will increase your score, don’t pay them off and close them. If you close an account, then it will decrease your overall credit available and probably raise your debt to credit rating, which will negatively affect your score and work against you.
Know Your Debt-to-Income Ratio
Lenders are very tied to your debt to income ratio because it tells them how much you have coming in versus how much you have to pay every month. Traditional lenders like to see a 40% or less ratio, so paying down your debt is critical; or you can increase your income, but typically they will only take additional income into account if you have proof of stable income.
Explore Lender Exceptions
There are usually exceptions to every rule, even when it comes to mortgage lending. If you have one major issue impacting your ability to qualify for a mortgage, you can ask for a charge-off of a one-time event. If you can provide proof that it was just one mistake or blip, then they might grant you an exception and take that one piece off of your credit history. These types of borrowing situations are typically called “bad credit home loans” or “recent credit event loans.”
Consider Non-Traditional Lenders! Non-QM Loans
Although most people obtain a loan through traditional banks and lenders, there are other options available for borrowers.
Bank Statement Loans
Bank statement loans are loans that do not require things like employment verification, tax returns, W2s, or pay stubs. The lender uses your personal or business bank account balances to verify that you have the cash resources available to repay the loan. Because these types of loans involve more risk for the lender, the interest rates are typically higher and the payback terms are shorter.
Foreign National Loans
If you are a foreign national having a hard time obtaining a loan due to lack of credit history in the US, or if it isn’t enough to qualify, a foreign loan can take into account other documentation and types of credit to qualify. The biggest back draw is that the interest rates are typically higher and they typically require a large down payment to secure the loan.
An interest-only loan involves only paying the interest of the loan, not the principal. That means that payments are going to be less because you aren’t paying down the loan directly, but that gives you a lot of leeway for the debt-to-income ratio. At the end of the loan term, you do have to pay a lump sum to pay the loan off, or you can roll the remaining loan amount into a traditional mortgage or other lending product if your ability to borrow changes.
Asset-based loans are business loans that use a company’s assets as collateral to borrow money. Traditionally, you can borrow as much as 70-80% of your company’s receivables and up to 50% of your finished inventory. These loans tend to have a higher annual percentage rate than traditional options, with the APR ranging from 7-17% or more.
In the real estate market today, it is critical that you have financing available before you even put in an offer since competition is so high and inventory so low. If your client is having a hard time obtaining a mortgage loan through traditional channels, let us help. At HomeSpring Mortgage, we find solutions where others see roadblocks. Contact us today and let’s get started!