Ways to Avoid High Risk Mortgages
Posted by David Schneider | July 17, 2007

There are many mortgage options available in today’s financial market. Some are conventional loans that require a down payment, a steady income source and a good to excellent credit rating. While others are exotic loans that offer creative financing packages to people who would not traditionally qualify for a conventional loan. There are also loans for people who can’t afford to make a 20 percent down payment. People who do not have perfect credit sometimes feel that their only option is to accept a high-risk mortgage, such as an interest only, an ARM or an 80/20 loan. Well this is not the case. There are ways to qualify for a conventional loan when you have a less than perfect financial profile. You just need to learn what they are.

Work on Your FICO Score

People who have average credit ratings may miss qualifying for a conventional loan with great terms by ten or 20 FICO score points. If this is the case, then you don’t want to apply for a high-risk mortgage without first considering working on your FICO score. Since your FICO score is just below the cut off for a conventional loan, it is in your best interest to work on your FICO score to raise it above that line. Some easy ways to raise your FICO score is to pay down the balances on your credit cards and to continue to make on time payments. You also want to avoid opening any new credit lines during the six months leading up to applying for a mortgage.

Get a Co-Signor

Another way that you can avoid taking out a high-risk mortgage is to get a person with great credit to co-sign your mortgage. You can ask your parents, a friend or your business partner to co-sign your loan. If their credit score and financial profile is strong enough, they can improve your chances of being approved for a conventional loan.

Increase Your Stated Monthly Income

If you were turned down for a conventional loan because you didn’t have enough income to qualify for a mortgage, then you may want to either increase your work hours at your current job, or you can take out a second job. In many cases, you only need to increase your monthly income by $500 to $1,000 per month to qualify. If you receive alimony or child support, then you will also want to include this on your mortgage application. These monthly stipends are considered regular income and can help you to qualify for a conventional mortgage.

Increase Your Down Payment

Another way that you can avoid high-risk mortgages is to increase the amount of money that you have available for your down payment. There are several ways to raise funds for a down payment. One way is to have a garage sale. You can also take out a second job for a year and use the income from this job exclusively for your down payment. Also, you can apply for down payment grants.