Buying a Home with Bad Credit
It pretty much goes without saying – lenders prefer to give loans to people who have good credit versus those with bad credit. It is a reassurance to the lender that the mortgagee will be able and likely to repay their debt.
Understanding what your credit score is an important part of the process of obtaining a mortgage. Before you meet with a mortgage lender about getting approved you will want to know where you fall on the spectrum.
The last place you want to be caught off guard with finding out you have bad credit is while you are sitting in front of a lender.
Understanding Credit Scores
Credit scores have a range of 300 to 850. You want your credit score to be high. Your score is calculated based off of facts such as: your outstanding debt, debt-to-income ratio, and if you make your payments on time. If your score is 740 or above you are considered to have excellent credit.
On the other hand, once your score falls below 620, you are considered to have a bad credit score. When you are below the 700 mark lenders will think carefully before just writing you a loan.
Correct Any Errors
If you have a low credit score one of the first things that you should do is check your credit report for errors. It is not uncommon for people to find errors on their credit report.
If you find yourself in this situation, work quickly to get them corrected because it can be a time consuming process. If you have something that shows on your report that was a one-time mistake on your part and you have since corrected it, try calling to see if the company will have it removed from your credit report.
However, for legitimate mistakes and actions on your part, the main way to improve it is over time. Get caught up on any past due payments. Make sure you pay all payments on time going forward.
Do not let there be any other actions that could negatively affect your credit score.
Obtaining a Mortgage
Just because you have a low credit score does not mean that you automatically will not be able to get a mortgage. If one lender turns you down, keep looking, but expect that it will cost you.
Mortgage holders with lower credit will have higher interest rates. However, rates for mortgages right now are at all time lows, so even if you are paying a higher rate it could still be lower than those people were paying several years ago.
You can also talk to a lender about being approved for an FHA Loan if you have at least a credit score of 580 or higher. You will have to make a small down payment, but the program allows many people to obtain a mortgage that would not be able to do otherwise.
A low credit score is not necessarily the end of the line for your dreams of homeownership. You should work to increase your credit score, but that doesn’t mean that you need to wait to purchase a home. You can still buy a house with bad credit.