Finding home loans with bad credit is not for the faint of heart, or at least not something you should do without doing some serious homework. But there is good news if you are a first time home buyer wondering how to buy a house with bad credit: it is doable!
A good credit rating usually means you’ll get a great mortgage. A bad credit rating means you’re in trouble, but you shouldn’t just throw in the towel. From low credit mortgages to cash options to down payment strategies, this crash course teaches you how to buy a home with bad credit. Yes he can be finished.
What is a bad credit score?
First of all: even if you have a vague impression that your credit score is bad, it is not enough. Is it that bad?
Ideally, you should check your credit report well before meeting with a mortgage lender. Your credit score is based on the information that appears on this report, and you are entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
Credit scores, also known as FICO ratings, range from 300 (horrible) to 850 (perfection).
If your credit score is 750 or higher, “you are in the top category” and positioned for the best interest rates and the most attractive loan terms for buying a home, says Todd Sheinin, mortgage lender and COO of New America Financial in Gaithersburg, Maryland.
A good credit rating is 700 to 749. If you fall below this range, lenders will start to wonder if you are a risky investment as a potential borrower.
“If your credit stinks, you are immediately at a disadvantage and you may have trouble qualifying for a home loan,” explains Richard redmond, a mortgage broker at All Mortgage Loans in California in Larkspur and author of “Mortgages: An Insider’s Guide”.
Check for errors
If your credit rating is poor, that’s no reason to blame yourself (at least not immediately), because you might not even be responsible for all of these imperfections.
Creditors frequently make mistakes when reporting consumer slippages. In fact, 1 in 4 Americans find errors on credit reports, according to a 2013 survey by the Federal Trade Commission. So be sure to scan your credit report for slips that aren’t yours. From there, you’ll need to contact the organizations that provided the wrong information (for example, a bank or healthcare provider) and ask them to update it. Once done, your credit score will increase accordingly on your credit report.
As for the errors which are your fault? If these are one-time errors, it never hurts to call and request that they be removed from your record.
However, the only solution for major errors (chronic credit card debt) is time. Banish bad credit by making payments on their due date (late payments really are the devil for hopeful homebuyers), and you will gradually see your credit score rise. Don’t expect to rewrite your credit history overnight. You need to prove to lenders that you’re up to making those mortgage payments on time, while saving for a down payment, of course. Nobody said it was easy !
Paying off a mortgage for bad credit
Depending on your credit rating, you might still be eligible for low credit mortgage options, but you should expect to pay a higher amount. interest rate, Sheinin said. Getting a mortgage with a higher rate means you’ll pay your lender more interest over time, of course, but it at least allows you to join the home buying club.
With interest rates still historically low (check yours here), it might be a good idea to buy now and take the higher rate.
Get a low credit home loan
A Loan from the Federal Housing Administration is an option for potential home buyers with poor credit, as the FHA typically offers these mortgages for less than perfect credit scores and first-time home buyers. The FHA requires a minimum credit score of 580 (and other requirements) to qualify, but FHA loans also allow you to make a down payment as low as 3.5%.
The big drawback? Since the federal government insures these low credit home loans, you will pay a mortgage insurance premium, which is currently valued at 1.75% of the base FHA loan amount. However, depending on your actual credit score, some conventional loans may still be available to home buyers with poor credit, and these loans may require a down payment slightly less than the FHA loan minimum. Make sure to do your homework when exploring the FHA option.
Increase your deposit
If you have poor credit but have a lot of money saved, some mortgage lenders might be willing to approve you for a home loan if you do a bigger one. advance payment.
“The more funds you put in, the more you minimize the risk to the lender,” Sheinin explains.
So by increasing your down payment to 25% or 30% on a conventional loan, instead of the standard 20%, you will strengthen your mortgage application, which will make you much more attractive to a lender. Remember that your bad credit can still negatively affect the interest rate on your mortgage.
Still, the luck of owning your own home can outweigh these drawbacks at any time. So, if you are convinced that your credit history is sure to shatter your dreams of buying a home, well done! Get to work overcoming your bad credit: develop a healthier relationship with credit cards, work with a knowledgeable lender, and explore all of your mortgage options.