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So, you’re ready to buy a home. You’ve done hours of research, sat through meetings with mortgage lenders and realtors, and you feel prepared to take the plunge.
Whether you’re a first-time buyer or an experienced homeowner, the process of buying a home can feel overwhelming.
One detail can have a significant effect on the mortgage options available to you.
That detail is your credit score. The little number has a lot of influence in the home loan world, enough to make securing a mortgage with bad credit seem nearly impossible.
Still, if you’re hoping to buy a house with bad credit, there are options to help you get there. So, keep reading as we explain the home buying process with a low credit score, and some steps you can take to improve your credit score.
You probably know that a credit score can range from 300 on the low end to 850 at the highest. But what you might not know is how your score is placed on this spectrum.
Credit scores are tracked by three main credit bureaus: Experian, Equifax, and Transunion.
Your credit scores can differ depending on the scoring model and the information in your credit reports. Review your reports from all three major credit bureaus before applying.
There are two main models of credit scoring: one developed by FICO and the other by VantageScore.
Mortgage credit requirements vary by loan program and lender. Ask which credit scores they use and how your income, debts and down payment affect qualification.
Be sure to check for errors in your credit reports, too. The bureaus may receive different information about your credit history.
If your credit score is in the 300-550 range, you might assume you have poor or bad credit.
While this makes sense in terms of your FICO or VantageScore determination, you’re not getting the full story.
The trouble is, your lender decides what a bad credit score is. And the loan they offer you will depend on several other factors:
•How much cash you have for a down payment
•Your overall amount of outstanding debt
•Your income
•Any debts you have in collections
These factors will vary by lender, so if you have a low credit score be sure to do some research before making a final decision.
We get it, improving your credit score isn’t the solution you want to hear, and it probably won’t be easy.
Still, improving your score just slightly could save you thousands in the long run. Here’s a short list of steps you can take to improve your score:
Stay on top of your Payment History: Make required payments on time. Payment history is an important factor in credit scoring.
Reduce your Credit Utilization
Credit utilization measures your credit card balances relative to your credit limits and can affect your credit scores.
So, let’s say your credit limit is $15,000. If you’ve spent $7,500 your credit utilization will be 50%.
Keep your credit card balances low relative to your limits. There is no single utilization percentage that guarantees a particular credit score.
Debt Collections and Your Credit Report
Collection accounts can affect your credit and mortgage application. Most negative account information can generally remain on your credit report for up to seven years. Paying a collection does not automatically remove it or guarantee a higher credit score.
Review your credit reports for inaccuracies and dispute errors with the credit reporting company and the business that supplied the information. Do not assume that paying for deletion will remove accurate information or secure mortgage approval.
Consolidate your Debts
Do you have a number of outstanding debts? If so, you might want to consider consolidating your debt into a single loan payment.
A debt consolidation loan replaces multiple debts with a new loan. Whether it saves money depends on the interest rate, fees and repayment term. A lower monthly payment can still mean a higher total cost if repayment takes longer. Consolidation does not guarantee a higher credit score.
If you’ve done everything you can to improve your credit score and you’re still on the hunt for a new home, there are some steps you can take to secure a good mortgage.
Do your Research
Shopping around for lenders isn’t fun, but waiting for the right lender could mean a lower interest rate.
A difference of 0.5% could have a huge impact on how much you pay the bank during your loan term. For more on how your mortgage interest rate is calculated and what it means for your wallet, click below...
Look into Bad Credit Loan Options
FHA loans are insured by the Federal Housing Administration and may allow a down payment as low as 3.5% for eligible borrowers. That percentage is a down payment, not an interest rate. Credit requirements and loan terms depend on the program and lender.
Eligible borrowers may also qualify for VA or USDA loans with no down payment. VA eligibility includes service requirements, while USDA eligibility includes income and property-location requirements. These programs still require qualification and do not guarantee a particular interest rate.
Shell out on your Down Payment
If you have bad credit, cash could be your best friend when it comes to getting a loan from the bank.
While a lender might turn you down for a low credit score, if you’re able to produce a larger down payment you may have a better chance of securing a loan.
Preparing to buy a home means understanding your income, expenses, existing debts and the payment you could realistically afford.
Money Max Account is financial software that uses your financial information to calculate a projected payoff plan. It can help you explore how payment choices could affect your cash flow and existing debts as you prepare for a home purchase.
Those projections depend on your information and assumptions. Money Max does not replace a mortgage application or guarantee a higher credit score, loan approval or a particular payoff date.
Want to understand how the software works? Contact our team to learn more.