The housing market is showing signs of recovery after the housing crash, but many of the homeowners who were foreclosed upon during that time or forced to short sell have found their credit and finances heavily damaged.
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Some of those people may never want to own again, but for those who want to give it another shot, there are a few things to keep in mind this time around. The answer to whether you can buy a home with flawed finances is simple. Yes, you can buy a home. But there are some steps you can take to give yourself the best chance at keeping your home for the long run.
Build a Solid Emergency Fund
This is by no means a requirement for buying a house, but it's one of the smartest things you can do before the homebuying process even starts. Potential homeowners should save up at least three months’ worth of expenses (including mortgage) in order to weather a job loss, family illness or other financial emergencies.
And there's a reason it's called an emergency fund: that money should not be touched unless there's a true emergency. A lot of homeowners were living paycheck to paycheck during the last housing bubble, and when they lost their jobs, they soon also lost their houses since they couldn't make the monthly payments.
Work on Your Credit
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If you have a spotty credit history, then your best option might be to just wait it out. While you are waiting to buy another home, you should work on improving your credit score. There are plenty of things you can do to work on your credit right now.
- Pay your balances in full every month. Lenders like to see a low utilization rate and debt-to-income ratio.
- Don't apply for any other lines of credit. Too many inquiries is a red flag for lenders, since they don't want to lend money to people desperate for credit.
- If you're going to close cards, don't close any of your oldest ones. Since average age of accounts is a large aspect of your score, you could hurt your score by closing longstanding accounts.
Talk to Your Lender
A lender will be able to give you the best idea of why you can't get a loan. If you're constantly getting denied, even after taking all these steps, you might want to check with another lender. Some lenders will still loan to people with low credit scores, but they will charge a higher interest rate in order to account for the risk.
One alternative to traditional financing is the government's FHA program. These mortgages are made by traditional lenders but they are federally insured. They require only a 3.5% down payment but you will have to pay monthly mortgage insurance. If you're unable to obtain traditional financing, it's worth looking into other options, such as the FHA program.
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