Buying a home is one of the most rewarding yet daunting endeavors that one can undertake. Applying for a mortgage is already a challenging task in itself, but when your credit score is not perfect, it feels almost impossible at times. Nonetheless, there is hope for homeownership even if you have a low credit score below the national average. This article provides a step-by-step guide you can use to understand how to buy a house with bad credit.
Understand What a Low Credit Score Means
The first step in the process of assessing credit risk is to get an understanding of what is considered to be bad credit. FICO credit score model goes from 300 to 850. The majority of lenders define a “good” score as 670 and above. Therefore, if your credit score drops below this point, you would be classified as a high-risk borrower with poor or bad credit. Some of the most frequent causes of a low credit score include; timely payment history, collections, credit histories, and credit balances. Although, one need not be denied a mortgage simply for having bad credit but options will be limited to those with poor credit ratings. You will probably be offered higher interest rates to compensate for the additional risk that the lenders are exposed to.
Fix Credit Report Mistakes
However, it is important that prior to applying for a mortgage, one should go through the credit reports provided by Experian, Equifax, and Transunion. To minimize errors, ensure all details such as balances due or payment history are correct. If there are mistakes, let the credit bureau know about it and provide proof to have the mistake corrected. This can increase your credit score significantly in some circumstances. A minor inaccuracy may allow access to better conditions for a mortgage so it is useful to challenge inaccuracies.
Pay Down Existing Debt
Also paying less than what you are at present indebted for will also increase your credit score. Therefore, minimize unpaid collections, credit card balances, and personal loans before getting into contact with lenders. Ideally, credit utilization ratios on credit cards should be below 30 percent of the total credit limits. Every cut in the debt balances is good news. Develop a debt snowball plan by ranking all debts in order of highest interest rate, making minimum payments on all while making timely payments, and focusing all extra payments on the debt with the highest interest rate.
Become an Authorized User
The second and final credit improvement strategy is the basic move of having a family member or spouse with good credit scores to add you to their oldest credit card account. This provides you with their lengthy positive payment histories right away which greatly affects the length of your credit history. Just ensure that the card issuer can report the activity of the authorized user to the three major credit bureaus. And do not use the card once added in order to minimize the negative effects.
Create Savings and Make Any Changes to Your Debt-to-Income Ratio
Mortgage lenders expect you to invest in the project, and this is in the form of a down payment of an amount that ranges between 3-20 percent of the overall cost of the property. They also desire to observe reserves after the closing and ability to repay the loan by considering income and other recurring obligations. To increase your chances of getting credit, it is wise to save for the maximum amount of down payment and reduce liabilities to have minimum debt to income ratio. It also shows that you have enough liquid cash at the time of closing that can also be utilised to pay for sudden home expenses.
Explore Specialty Mortgage Programs
If traditional bank lending seems far-fetched, there are numerous other possibilities. There are several programs through government agencies such as the FHA, VA and USDA that assist buyers with low credit scores, little down payment or who intend to live in rural areas. These mortgages need less down payments of as low as 3. 5 percent. However, there are also other types of products such as manual underwriting from portfolio lenders or subprime mortgage from non- prime lenders when you have a bad credit score. The corresponding interest rates and fees are higher but reasonable if properly applied.
Down payment assistance programmes: a guide to finding out if you are eligible
Apart from the conventional government insured mortgages, many a local and state housing agency provides down payment and closing cost as grants and second loans at relatively lower interest rates. The purpose of these programs is to assist individuals with less than perfect credit score to own homes. If you meet certain requirements set by the program, which are usually based on your location, job, or income limits or veteran status, you can get one of these programs that contribute between 3-10 percent of the price of the house for your down payment, closing fees, or prepaid costs. This reduces a burden on savings so you can buy earlier.
How to Choose the Best Bad Credit Mortgage Company
Looking for lenders that settle for individuals with low credit scores is a bit cumbersome but can be done. Begin your search by consulting your real estate agent. Review sites of online lenders also present skilled professionals who offer credit to those with poor credit ratings. You need a professional who knows all about low score mortgages and who is ready to give you a comprehensive credit check rather than merely looking at your credit score. They are able to evaluate all compensating factors, including but not limited to the scores, and help get you to an appropriate loan using your strengths to cover for the low scores.
How to Build Your Credit Before Applying
Finally, in the months preceding your search for a home, try as much as possible to improve on your credit score. Always pay all current bills before the deadline or at most just after the due date while maintaining small balances. Also do not apply for any new credit or do not open or close any of your existing credit cards. Each and every advancement made will have an impact on your interest rate. For the final step before applying, pay down balances once more to decrease utilization and then request creditors to report the reduced balances to the bureaus. Rapid rescoring can raise your scores up in as little as 5 days which makes them ideal when your lender is about to pull your scores to approve your loan.
Despite the difficulties associated with buying a home with bad credit, the given steps will assist you in achieving approval. Stay determined and proactive. But as they often say, with careful calculation and a good lender to assist you, home ownership is still feasible even for those with low credit ratings.
