How to Buy a House With Bad Credit
Having a low credit score can make it more difficult to do a number of things- rent an apartment, get a loan, and of course, secure a mortgage to buy a new house. Poor credit can make you appear riskier to lenders, and they may assume you’re financially unstable or unwilling and unable to pay off your debts. However, this isn’t always the case- sometimes, not understanding how credit works or a brief rough patch in the past that required debt can lead to a deceptively low score. The good news is that you can still be a candidate for homes for sale in Groveland, FL, despite a low credit score.
What Is Bad Credit?
Everyone person is assigned a credit score on a scale of 300 to 850 that represents their debts, income, and history with paying off debts. While each lender may have slightly different cut-offs, the below is generally what ranges of scores are considered to be good or bad.
Poor (under 640): Borrowers in this credit score range are generally considered high risk by lenders. Credit in this range usually means you won’t qualify for a conventional mortgage, though you may be able to get one through a government-backed program.
Fair (640 to 699): In this range, lenders see a borrower as less risky than the lower one. You may have less debt or a more favorable payment history than those with a score below 640 and can usually qualify for a conventional mortgage. However, you may need other evidence that you are a good investment and may have a higher mortgage rate to compensate.
Good (700 to 749): With good credit, it will be much easier to qualify for a mortgage with a low-interest rate. You may even be able to receive multiple offers from lenders to shop around for the best option.
Excellent (750 and above): A score this high demonstrates your ability to manage debt, consistently make payments on time, and leave much of your credit untouched. Along with a steady income, this will qualify you for multiple lenders and the best interest rates.
What Do Lenders Consider Besides Credit Scores?
Credit scores are always an important factor in eligibility for a home loan, but lenders do take other considerations into account. If your credit score is considered poor, having a positive mark in one of these other areas may be what helps you secure a mortgage.
Down payment: Depending on the loan and the lender, you will usually need a minimum of 0% to 5% to put down. Larger amounts mean your loan will be smaller and may help you secure one.
Debt to income ratio: This number is usually expressed as a percentage, and the ideal is considered 36% or below when applying for a mortgage. There is usually an upper limit like 45% or 50% of your income, at which point you won’t be eligible for a mortgage with most lenders.
Cash reserves: Being able to demonstrate six months’ worth of mortgage payments in the bank can make up for a low credit score and/or a low down payment.
There are also guidelines that vary by loan type. For example:
- A conventional mortgage (one not insured by the federal government) needs a minimum of a 620 score.
- An FHA loan (government insured for first-time buyers) will require a 580 score with 3.5% down or a 500 score with 10% down.
- A VA loan (government-backed for military service members and their spouses) has no credit score limit, though individual lenders may impose them.
- A USDA loan (government-insured loan for low-income applicants in rural areas) has no limit.
Bad Credit and Mortgage Rates
Lower credit scores often mean that when you secure a mortgage, the rate is higher. With a score in the poor range, you can expect to pay at least 1.5% more than someone who falls into the excellent category. This means a higher monthly payment as well as a higher cost over the course of the loan.
However, even if you secure a loan with a high rate, that is not necessarily the rate you will have forever. It could be possible to refinance your loan and get a better rate after you are able to improve your credit score. But a refinance will also come with additional closing costs, so never buy a home unless you can afford it at the current rate.
Tips for Securing a Mortgage
Based on some of the factors discussed above, you may be able to secure a mortgage already, even if you have poor credit. However, there is always a benefit to improving your credit score and your overall financial situation. Each of these tips can be adapted to fit your needs and lifestyle.
Keep an Eye on Your Credit
The best way to improve your credit score is to understand why it is low (or high). Everyone with a score is entitled to a free copy from each of the three national credit reporting agencies annually at AnnualCreditReport.com. With these, you can analyze the report and make sure it is all accurate, as well as reporting and disputing anything that is a mistake. Other free tools allow you to check weekly and understand how your financial activity may impact the score over time.
Pay Your Bills on Time
The most important factor that determines about 35% of your credit score is payment history. Any credit card, auto loan, and other debt payments should be posted to your account by their due date. Doing this consistently will boost your score.
Pay Down Debt
Another 30% of your credit score represents how much money you owe relative to how much credit you have, or your credit utilization rate. The lower this ratio, the better. For example, if you have a $5,000 credit line and owe $500, your rate is 10%. If you owe $4,000, it is 80%.
Any time you rack up a credit card balance, try to pay it down before the next statement is issued to keep your rate down.
Avoid Hard Credit Inquiries
Any time you apply for a loan or credit card, it will ding your credit score when the creditor conducts a hard inquiry. Some websites will let you shop for rates before submitting an inquiry that impacts your credit score to avoid multiple dings.
When you open a new account or close an old one, it will also decrease the average age of your accounts, which is a factor that accounts for 15% of your score. But sometimes, adding a new card or credit line may have a more positive impact than a negative one.
Try a Rapid Rescore
Credit scores are generally updated every billing cycle. This means that after you do something positive like pay down a credit card balance, your credit utilization rate may not reflect the payment for up to a month.
But if you’re in a hurry to boost your score before a lender pulls it, something called a rapid rescore can be helpful. This process speeds up the change to your credit score. If you’re close to having a good enough score to qualify, your lender may recommend a rapid rescore to push you over the edge immediately.
Consider Other Loan Types
A conventional mortgage will have the most stringent credit score requirements, but other options exist to help people with low income or poor credit buy homes. The government backs a number of loans, including FHA loans, which allow for lower credit scores and lower down payments. Other options have no credit score requirement but stricter eligibility criteria in other areas.
VA loans, for example, are only available to service members who meet requirements surrounding the length of their service and character of service. Their unmarried surviving spouses can also qualify.
USDA loans will apply to low or very low-income applicants, but only in eligible rural areas.
Save Up for a Larger Down Payment
A larger down payment shows your investment in buying a home and can make you look less risky to lenders, as well as meaning you won’t need as large of a loan. Being able to put a larger amount down can also mean you don’t need to pay for private mortgage insurance, allowing you to pay less each month and have a lower long-term interest rate.
Use a Co-Signer
If you have a loved one with credit better than yours, they may be able to sign on your mortgage and help you get approved for a loan or a better interest rate. However, they will be taking on a huge responsibility of the obligation to pay your mortgage if you default or risk their own credit score.
Shop Around for the Best Offer
Even with poor credit, some lenders will offer you better options than others, and you may be able to find a good mortgage. It’s always a good idea to talk to multiple lenders and see what options are out there.
Overall, if you want to buy a home but worry your credit will hold you back, there are a number of options to explore.
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