Buying a house is a massive undertaking. As a home buyer, you are probably relying on a mortgage to get the funds they need to purchase a new home. Lenders consider various things before they give these buyers a mortgage loan. One area they consider is one's credit standing.
Your credit score shows your creditworthiness to a bank and gives the bank a window into how you have handled past credit.
Can you buy a house with bad credit?
This post will help you discover the answer.
Credit Scores
Here is FICO's credit rating and how a lender will view your credit score.
- Exceptional credit standing — above 800
- Very good credit score — 740 to 800
- Good credit standing — between 670 and 740
- Fair credit rating — between 580 and 670
- Poor credit score — below 580
Lenders look at your credit rating before they decide whether to give you a mortgage. It is very unlikely for them to deny you a loan for the property. The good news is you can a mortgage with a less than stellar credit score. But, it will limit your options for more favorable loan programs and the interest rate for your home mortgage.
The FHA Loan is the perfect loan program for borrowers with fair to poor credit. It offers competitive interest rates and offers a government guarantee to back the loan if a borrower should default.
Preventing or Fixing Bad Credit
While having a low credit score isn't the end of the world, it may be best to have high credit standing. Lenders are likely to give you loans with favorable interest rates and terms if you have a good credit score. They know you aren't a high risk for default.
Your credit score also translates into better terms for credit cards, car loans and even insurance rates.
Improving your credit score can save you a lot of money over a lifetime. Having a good credit score will lower your rates on home loans and any other line of credit you may seek in the future.
- Avoid going to collection or settling a debt. While at the time it may seem like a good idea they are both serious credit dings that will stay on your credit report for a long time.
- Note and dispute errors in your credit report. Many credit reports show errors and it is a good idea to review your credit at least once a year.
- Pay your debts on time. A solid history of paying your bills on time will help improve your credit as well as prevent serious credit dings.
- Don't open too many credit accounts in a short period. 3-5 lines of credit should be the maximum amount of lines you should have open.
- Don’t max out your credit cards. One part of the credit scoring is what percentage of your available balance you use regularly.
Be honest and forthcoming when seeking a mortgage. Inform the lender of your credit's bad reports when you buy a house with bad credit.
This transparency saves everyone time, as they will look for the right loan from the beginning. Don't close your accounts to remove them from your credit report — it does not work.
Reasons for Being Turned Down for a Mortgage
A lender can turn your mortgage application down for various reasons. They include:
- Overextended credit cards
- Legal judgments
- Defaulting on loan repayments
- Overdue taxes
- Bankruptcy
- Overreaching
- Collection agencies are after you
Ask the lender to discover whether these issues locked you out from qualifying for a home loan. Many lenders have programs that will also help you tweak your credit score. About every 20 points in improved credit can also improve your interest rate and options in obtaining a home mortgage.
How To Get a Mortgage When You Have Low Credit Standing
Getting a mortgage when you have a low credit rating can cost you a lot of money. It is essential to follow the proper steps to minimize the loss.
1. Compare Lenders' Terms
Some lenders have better mortgage terms than others. Check with various lenders to save some money by getting lower interest rates or paying fewer fees. You may also check out non-bank lenders and credit unions.
2. Consider Your Mortgage Options
Check out the bad credit home loan options. They may include FHA mortgages, USDA home loans, VA financing, Freddie Mac Home Possible Loan, and Fannie Mae HomeReady mortgages.
3. Get a Co-Signer
A family member or friend with good credit standing can co-sign your home loan. The co-signer boosts your application, pays the loan if you default, and suffers in credit standing if you delay repaying the mortgage.
4. Find Downpayment Help
You can get help with the downpayment from the over 2,500 programs nationwide. They can give you grants and credits.
5. Search for First-Time Buyer Programs
These programs may be more accommodating to your predicament. Anyone who hasn't owned a home in the last three years can be eligible for them.
6. Make a Large Downpayment
If you have bad credit standing and substantial savings, use the money in the reserve to make a large downpayment. Lenders may give you a home loan if you take this step.
Getting a mortgage for a home purchase is a must for home buyers. Improve your credit standing before applying for a home loan to get more favorable terms as well as opening up your options for different loan programs.
If you can't improve it before you need a mortgage, consider a loan program like the FHA. The FHA is designed for people with less than stellar credit as well as other relaxed underwriting guidelines. Take advantage of them to get the financing you need.
As a final note having a home mortgage and paying it on time for 1-2 years will go a long way in improving your credit as well.
Don’t think because your credit isn’t the greatest you won’t get a home mortgage. Pick up the phone and call your local lender to find out how easy it can be to get a mortgage with bad credit.
