 Personal Finance PowerPoint Presentation How to buy a house with bad credit Get ready to get financially fit by practicing personal finance Most of this information can be found at Investopedia Where you can go to look at the references resources Continue your research from there This is by Ray Houtley Beck Published January 3rd, 2022 How to buy a house with bad credit Buying a house is absolutely possible with bad credit In other words, you might be thinking, I don't think I could buy a house Because I have bad credit That is going to be a hurdle to go through Because when we go through the home purchasing process Typically we're going to be needing financing Because we're not usually able to put the cash down up front And when we go through the financing process We would like to get as favorable financing as we could It would be as easy as possible to get the most favorable financing If we could check off all the boxes Including things like having good credit Would be a good one Being able to put a good amount down Like a 20% down payment For example, having a solid income From a dependable source One which the bank thinks is a dependable source Those are all things that look good on the lender's side of things And if it looks good on the lender's side of things That means that they're going to have less risk Or feel that they have less risk And that usually means that we get a more beneficial process For us But what happens if we can't basically check off All those nice shiny boxes though But it is harder and more expensive Than it would be for people with excellent credit So obviously having better credit Would make the process easier to do Because we'd be checking off that box If not, then we're going to have to go through A little bit more difficult process But possible to still get the loan possibly Before starting the home buying process You should consider why you want to be a homeowner So clearly that's one of our decision making process points When we want to get into the home Why do we want the home? Is it going to be an investment type of thing Or is it more like something that we want to live in For a long period of time In other words, most of the time when people purchase a home They might feel one, I need the home for my personal That's where I want to put my roots down That's where I want to be for a long period of time And I want this location here That would be the one reason The other reason would be, well I feel pressured To put an investment in I want to invest in the home And I feel like there's certain people And or maybe even the government With the deductibility of taxes and interests Kind of incentivizing purchasing a home So I feel almost obligated to buy a home Now normally I would think that that first one Would be the more legitimate reason, right? If you're going to be able to afford the payments On the home and you're able to stay in the home For a long period of time And that's where you want to be Then even if there's a fluctuation in the market Then in the long run if the home serves its purpose And you're able to make the payments You'll typically be better off If you're purchasing it as an investment Then it's likely that you're going to be worrying A lot more about the increases and the decreases In the market and possibly in it For more of a short term time frame And so you want to just make sure That you're aware of that when you go into it So home ownership has many large unexpected costs That can be difficult to cover If your financial situation is unstable Continuing to rent indefinitely Or until your credit improves May be the best financial choice for you So if your credit isn't great Then it might be You want to measure the pros and cons Which we've taken a look at in the prior presentation About whether it be best to rent Or the pros and cons of renting Versus home ownership home purchase So an FHA loans Your credit option for bad credit Federal housing administration FHA loans are loans insured by the FHA But are actually issued by any FHA approved lender FHA loans are created to help low and moderate Income borrowers become home owners If individuals cannot get approved For conventional mortgages Then FHA loans are the remaining option For helpful home buyers with bad credit So clearly the FHA would be An option in that situation This is one of those things One of those kind of laws In addition to being able to deduct Things like interest on the home Possibly if you're itemizing And then the property taxes And then you've got these incentive programs Which were put in for many people As a good intention To help people achieve the dream Of getting a home But at the same time These are also the types of things That make us feel like We should get a home Or we're obligated to get a home The government is saying that Home is part of the process We'd be beneficial to do so And so note that these programs Have a lot of different incentives in them So of course we want to use them When they're applicable to us But I wouldn't use the program's existence The ability to deduct for example Interest and whatnot As rationale as to why to buy the home It's just another factor That you've got to put in the pros and cons To see whether it be a beneficial financial And personal choice So FHA loan requirements Credit score as low as 500 With 10% down or as low as 580 With 3.5% down So clearly the down payment Is another kind of key component So if we were taking like a normal loan Then and we just had the two people Involved the bank and the lender And we don't have like the third component Of the government Clearly the bank wants to make money That's their point here So they would like to give the loan Because they make the money from the interest However they've got to take on the risk Of people not paying back the loan And so the way they're going to mitigate the risk Is one they're going to put a substantial amount Down payment So the more down payment is put down The more the bank feels that the home Purchaser is invested in the home And the more secure they are in the event That the home purchaser or buyer The one taking out the loan If they default on the loan Then you have recourse to the home And the home should be valued above The loan value Because you put down the down payment So you can see that would significantly Lower the risk to the bank So the higher the down payment on the bank side The more comfortable they generally feel And then also of course the credit score Is the other big kind of factor That they're going to take into consideration Because that's going to give them some history As to your ratings And your ability to pay back the credit And then of course your income level Is going to be another big factor That will put into play and then possibly Your balance sheet after that point in time So debt to income ratio of 43% or less So we're going to use these kind of heuristics These ratios to help with our calculations On the lender side of things Remember that when you're using these ratios These ratios are the types of things That the lenders are going to use Because they want to be Able to apply something that's fairly consistent And which they can depend on For a large amount of people So note what the lender can depend on They can depend on gross income typically Because they can verify most of the time The W-2 or the deposits into the checking account At least or the income level In some way the 1099s or the tax return To help to verify the income They can't verify your spending habits Per se as easily Because those are things that aren't being reported On the taxes per se often times So they would like to have a heuristic On the gross income But note that that doesn't really reflect Your personal spending habits Might be very different than the average Other personal spending habits So you don't want to depend on the lender To be having them try to calculate Whether or not you can afford They're not doing the budgeting for you In other words they're doing it on their side To see how much they would be willing to lend you Keep those two things separate I want to go to the bank and I'd like to be able To have as much access to as much funding As I possibly could have If I need the funding I would like it to be there To hire the better And so that's what you're talking to the bank for On our budgeting side then I'm looking at My budgeting to determine how much I want to actually take out How much loan I can afford to take out I'm not dependent on the bank to do that I'm giving them the numbers hoping to get as much Financing available as I can And then I do my own kind of thought process In terms of how much I want to actually take out Hopefully I want to take out something Less than the amount that I possibly could take out If I needed to from the bank So verifiable income for two plus years So they're typically going to go back a couple of years To verify the income and the more solid The income sources the better to the loan So what they like to see is something that's like If you were like a tenured professor Or something like that and you're locked in your job They couldn't fire you if they wanted to Kind of thing then that's pretty secure You know what the pay raise is going to be and what not And obviously that would be a fairly secure item If you're an hourly employee and what not Even if you make good money hourly employee You're making a lot of overtime They might feel a little less secure Given the fact that the hours could fluctuate And what not and if you're sole proprietorship Then unfortunately they're going to be a little less secure Oftentimes because there could be fluctuations In that market as well So improve your credit score or taking a few steps To improve your credit score before home shopping Will improve your home buying experience Exponentially So if you can increase or if you can Increase the credit and there are tactics You could do to do so if your credit score is low Then you might want to take a look at that And today's hot real estate market Many home sellers are less likely to choose Offers with low down payments that will require them To deal with FHA's stringent appraisal process So if you know obviously when you got the government Kind of involved there's typically going to be Kind of more red tape that is going to be involved So if you're in a market where people are able to sell And the seller doesn't have to deal with that as much They might be tending not to if they don't have to So improving your credit score can allow you to get A conventional mortgage and make stronger offers On homes that are more likely to be accepted So if there's a lot of competition in the market Then you want to do whatever you can to get an edge Against the competition to pick up the home on your end So number one, pull your credit report to see Why your credit is low and check for error So what we can we do to get the credit score up We can take a look at the credit score That's the first thing to do, check it out Why isn't it excellent, why don't I have five stars on this thing This is free to do once a year from Experian, Equifax And TransUnion at annualcreditreport.com So these are the three credit kind of scoring agents places They go to, you know, the lenders will typically Go to all three of them and kind of check them out And so you can go to them and you can find them At this website if you so choose annualcreditreport.com Number two, pay down any revolving credit lines To improve your credit utilization percent This usually results in an immediate jump in score Number three, have any errors removed from your credit report Especially late payments, so if you have any late payments On there that are impacting negatively your credit score If there's a way to get those off of there Then that would improve your credit score Especially if they're erroneous then hopefully you can do so Number four, consider consulting with a credit report service To see if your score can be improved enough to save you The cost of their fees in reduced mortgage rates So why you should improve your credit score before buying Even improving your credit score by just a few points Before buying can still save you thousands of dollars So the better credit score is going to put less risk on the lender The lender typically feeling more comfortable if they have less risk Then they might be able to offer less in terms of the rates In terms that they'll be charging If boosting your score allows you to be approved For a conventional mortgage instead of an FHA loan You will save the upfront mortgage insurance premiums Of 1.75% of the loan amount Additionally conventional loans tend to have lower closing costs And interest rates than FHA loans While both FHA loans and conventional loans Will require a monthly mortgage insurance If you put down less than 20% an FHA loan Includes monthly mortgage insurance for the life of the loan That you can only get rid of by refinancing And paying closing costs on a new loan So that can get expensive if it's going over the whole time frame For a conventional loan the private mortgage insurance drops off Once your loan balance is equal to 80% of the property value So the general idea here is the lender wants to safeguard the loan If they're taking on a more risky loan Then they want the insurance And obviously if you take the FHA They're going to have the insurance the whole way out Because the whole point of the FHA is because it's more risky In the first place But if you take the conventional loan And you put in less than the 20% That's when they're usually going to say Hey look I got a more risky kind of component here Because you're not invested in it So I want the insurance up until the point Where I feel like you're solidly invested Which is that 20% down Or the loan equaling 80% of the property value And so then you might be able to drop it off A little bit faster then So optimize the rest of your borrowing profile Your credit score isn't the only factor That goes into being approved for a loan You can increase your likelihood of being approved For a loan under favorable terms Even with brand credit By optimizing the other parts of your borrower profile So putting your money down on your mortgage Putting more money down on your mortgage Essentially means that you are putting more Of your own collateral into the loan And makes the lender view you as less likely to default And a risk lower borrower So when we're looking at the different factors here The credit score is only going to be one factor Another factor is going to be How much revenue do you make They're going to be looking at that Balance sheet although you're probably stretching yourself To put as much cash down as you can Up front anyways And then the more money you're going to put down Up front then that's going to make the borrower Feel good as well So if you were able to overcompensate On one of those items If your credit score isn't as good as it could be But you could put more down up front Then you might be able to Compensate to some degree So if you are struggling to come up With down payment money There are many unique ways to beef up your funds Some areas even have down payment assistance programs Improving your debt to income The DTI ratio can also help you get approved For a mortgage with bad credit So the other factor is Your debt to income So there's two factors in there Debt and income That ratio that you can improve on So if you can pay off Or get rid of some of your monthly debt obligations Like a car loan Your DTI will improve Clearly if you can reduce some of your debt Then your debt to income Will be more beneficial Increasing your income by picking up a second job Will also improve your DTI So the second thing, another thing you can do of course Is increase your income line item Which will also increase The ratio of the debt to income That you know It's hard to know exactly What that's going to look like Because again the loan officer might be looking How far back your income is And look a couple years back On the tax return or something like that So if you picked up a new job You're like I'm working 80 hours How long has that been? It's been like a week They might not be completely comfortable That that's going to be a long term 30 year lasting capacity For you to be able to do that But again it kind of depends on the lending environment What the current regulations are In terms of how they're going to perceive that But clearly income going up Would offset or compensate for other Less favorable items to the lender So the easiest way to improve your DTI Is by shopping for homes At the lower end of your budget So if you're determined So clearly the debt to income Is trying to say how much home you can purchase So the other thing That people usually are trying to do Is they end up trying to buy a house That's on the high end Of what they might be able to purchase So if your DTI would be More favorable If of course you were shooting for less home Than the maximum amount You would be able to get if you were to maximize All other factors Such as your credit score And your down payment So if you determine that you can afford A house up to $300,000 But your credit score is lower Than you would like You can increase your odds by being approved For a mortgage if you choose A house that costs $250,000 So you might say hey look I can buy a home Up to $300,000 Based on you know like My income information or what not But I have some other Problems with my credit score or something like that So in order to maximize your DTI You could shoot for the home That's at the $250,000 And then of course then your DTI Would go up and possibly compensate With relation to the home Value and that would In the loan and so on that would increase Loan options For unique populations If you meet certain criteria You may qualify for a VA loan Or a USDA loan Both of these loan types allow you To put a 0% down Without paying private mortgage insurance And do not require a minimum credit Score which makes them a much Cheaper option than the FHA Loans, VA loans You typically have to be a veteran Who served for certain time periods Or under specific circumstances Or be a surviving spouse Of a veteran with specific circumstances VA loans are Issued by private lenders But backed by the VA You must have a certificate Of eligibility from the VA To get a VA loan USDA loans These loans are typically in areas designed As a rural by the USDA and borrowers must meet Income eligibility limits Based on the median income Of their country and their household Size