A few overdue credit card payments or a new credit score doesn’t have to keep you from buying a home for years. Although purchasing a home with bad credit is more challenging than purchasing one with a credit score in the 800s, there are many mortgage lenders prepared to work with people with poor credit scores.
What Does “Poor Credit” Mean?
You’re considerably more likely to skip a mortgage payment, take out loans than you can afford, or end yourself in bankruptcy if your credit score is low. But what does it mean to have “bad credit,” and what credit score do you need to buy a house?
To approve mortgage applicants, most lenders employ the FICO credit scoring algorithm.
To qualify for a conventional loan, you’ll need a credit score of at least 620 points on average.
How to Improve Your Credit Score
Even if you can receive a mortgage loan with bad credit, even the best mortgage company will charge you a higher interest rate than similar customers with good credit. It’s sometimes best to work on improving your credit score for a few months before actually applying for a mortgage loan. If you’re not sure where to start, follow these guidelines to improve your score over time.
- Examine your credit history: Did you know that approximately 20% of Americans have an error on their credit report? These errors can unduly impair your score, but they can be fixed.
Once every 12 months, request all three of your credit reports. Examine each of your credit reports for any errors. Showing details from people of a similar name as you, misspellings of your name or address, and listing loan payments as “late” when they were paid on time are all common blunders. Contact the credit bureau if you see a mistake. The agency must examine its records and demonstrate that the information given is correct. If the bureau is unable to verify the listing, it is compelled by law to remove it.
- Make an application for a secured credit card. If you don’t have a credit score or if your score is really low, you may have a difficult time obtaining credit. It’s easy to get caught in a Catch-22 position. You’ll need credit to grow your credit score, but you won’t be authorized for it unless you have a strong score.
When you’re in this circumstance, you should apply for a secured credit card. A secured credit card is a special form of credit card that you can get even if you don’t have a credit score or have bad credit. When you apply for a secured credit card, your lender will ask for a deposit, which becomes your line of credit. If you put down $500 when you open your card, for example, your lender will give you a secured card with a $500 credit limit. From here, the protected card functions in the same way as a regular credit card. You use the card to make purchases and pay off the balance each month. If you don’t make your payments, your lender just keeps your deposit.
A secured card will enhance your credit score over time if you make on-time payments. If you decide to cancel your card, your lender will repay your deposit less any outstanding balance. If you’re still trying to improve your credit score, a secured card can be a convenient method to do so.
- Keep your credit utilization to a minimum. Lenders will view you as a riskier prospect for any form of the loan if you utilize too much of your total available credit each month. Maxing out your credit card regularly implies that you may rely on credit cards to pay all of your bills or that you have little money saved. Your score will suffer as a result of this.
Limiting your credit utilization can help you improve your credit score if you already have a credit card. Each month, you should utilize no more than 10% of your total available credit. If this isn’t achievable right now, aim for less than 30% utilization and gradually reduce it month by month.
- Make sure you pay your payments on schedule. Your payment history for loans and credit cards accounts for around 35% of your total FICO credit score. Though it may seem self-evident, the easiest and quickest strategy to improve your credit score is to establish a track record of on-time payments.
How to Obtain a Mortgage Despite Having Bad Credit
There are a few options if you have bad credit and need to apply for a loan without boosting your credit score.
- Make an application for an FHA loan: An FHA loan is a sort of government-backed mortgage loan for people with bad credit. FHA loans are a less hazardous choice for lenders since they are insured by the federal government. As a result, they will be able to offer FHA loans to a larger number of customers. With an FHA loan, you may buy a home with a credit score as low as 580 points and a 3.5 percent down payment.
Certain institutions may even enable you to buy a home with an FHA loan if your credit score is as low as 500 points, as long as you put down at least 10%. Though not all lenders provide this alternative, if you have a higher down payment, local lenders may be more ready to work with you.
- Arrange a bigger down payment with you: The more money you put down, the less money you’ll need to borrow from your mortgage lender. Since a larger down payment lowers your monthly payment and makes it less likely that you’ll default, certain lenders may be ready to relax credit standards if you bring a larger down payment to the closing table. If you have bad credit, aim for a down payment of 20% or more.
- Describe your situation: There are a variety of reasons why you can fall behind on your obligations and experience a drop in your credit score, ranging from medical debt to an unexpected job loss. When you explain why you have a low credit history, you could be astonished at how accommodating mortgage lenders can be.