The idea of purchasing a home can sometimes be daunting. If you have bad credit, getting started with the process of buying a home can be an even tougher task to accomplish.
If you have bad credit, getting started with the process of buying your first home can seem especially difficult. There are ways of buying a home, and getting the loan that you need, even if you have a poor credit score. Bad credit home loans have been established and are available for those that qualify for them. This means that your credit score may not be as big of an obstacle that you think it is for purchasing a home.
This article will go over how to get a mortgage with bad credit, what you need to know about your credit score, what you need to qualify for a home loan, and what you can do to quickly improve your credit score.
Section 1: Understanding Credit Scores & Home Loans
How Do Mortgage Lenders Measure Bad Credit Scores?
Most people worry about how their credit score is going to affect their chances of getting a bad credit mortgage. However, there is no set credit score that will determine whether or not a lender will approve you for a loan or not.
When it comes to current mortgage lenders, they have the leeway to set their own qualification standards for who they will or will not approve.
There are also loans that are government-backed. These types of loans allow lenders to approve more people for loans in a worry-free way, but they still have minimum requirements for credit scores, while often lower than traditional loans.
If you are thinking of buying a house with bad credit and your score is less than 500, you will likely find being approved for a loan quite difficult. The smartest move you can make at that point is to work on improving your credit score first.
How Can I Purchase My First Home With Bad Credit?
According to a recent CNBC article, “a score ranging from 700 to 749 is considered ‘good’; a score from 650 to 700 is ‘fair’; and a score ranging from 300 to 649 is ‘bad’.” While having a bad credit score is not ideal, each case needs to be considered individually.
Every situation is different, with a variety of factors. Besides your credit score, mortgage lenders are also looking for:
- Total money available for a down payment
- If the total amount of your debt is small
- The amount of incoming money you receive
- If you have debts with a collector
If you are planning on buying a house with bad credit, having cash available can change the game. Using cash for your down payment will help you achieve your home-buying goals.
With a poor credit score, mortgage lenders can only approve a limited loan of so much money. Your approved loan may not be enough for the property you want. Having cash to take care of the difference will allow you to get what you want.
Each lender has different requirements, so depending on who you work with, there may be different factors to consider.
Even though poor credit mortgage lenders exist, it is important to remember that they often come with a higher monthly payment, because of high interest rates.
An important reminder – when buying a property with poor credit, you can potentially refinance your mortgage later on for a better rate if you repair your credit score.
Can I Buy A House With Bad Credit And No Money Down?
If you are wondering how to get approved for a mortgage with bad credit, we have some solutions for you. There are two main types of mortgage loans. Ones that get backed by the government and those that get backed by traditional lenders.
The main difference between these types of loans is that the government-backed loans are insured by the federal government, and traditional loans are not.
Government-backed loans have less qualifications for the down payment, your credit score, and your debt-to-income ratio. Lenders of these loans have less risks as well and sometimes you can obtain even better rates with lenders through insured loans as they're inherently less risky for lenders.
We wanted to know what loan options a person buying a house with bad credit has, and what the standards are for each one concerning credit scores. This is what we found:
To qualify for a conventional mortgage, there are no specific amounts required for income, down payment, or credit score.
For conventional loans, we found that most candidates require a credit score of 620 or higher.
Having a credit score of less than 620, it is still possible to receive a conventional loan if you have a larger amount for the down payment, or if you have a high income.
Using A Co-Signer:
If you are not eligible for a loan from a big bank due to a low credit score, there is the option of using a co-signer to buy your home. Using a co-sign mortgage means that a third party will be the guarantor of the mortgage, making them responsible for monthly payments if you are unable to pay them.
Using a co-signer for your mortgage means that you will likely get better rates that you would be unable to get on your own with a poor credit score. The co-signer is risking their good credit to support your mortgage, so often they are parents or close family members of the co-signee.
However, since their name is on the mortgage as well, you will need to remember that if you want to sell your property, as you will need their consent to do so.
What Are The Loan Options For Buying A House With Bad Credit?
If you are trying to figure out how to buy a house with bad credit, there are a few options for you.
Your credit score will impact your options. If your score is around 650 there will be better loans available to you, compared to those with a score below 650, rates for these buyers will begin to creep up as lenders look to bring in more money to cover their perceived risk.
Ultimately our lenders always recommend rebuilding your credit score
Section 2: Repairing Your Credit Score Before Applying For Home Loan
Why Should You Improve Your Credit Score?
If you know that you have a low credit score, the best thing you can do is to work on improving it. Take a look at our credit scores and real estate goals guide we break down 7 elements that will help raise your credit score.
Increasing your credit score will give you more loan options, possibly saving you thousands of dollars in interest fees, while at the same time qualifying you for loans with less income and down payment requirements.
A few quick tips: Keep your older credit cards, these aged history cards are great for your credit score history. Diversify your credit, this will demonstrate to lenders that you are capable of managing multiple forms of credit responsibly. Limit your applications for credit, someone who's constantly seeking new lines of credit are red flags for lenders as it's typically an indication of someone in need of money and not someone in a financially stable position.
If you have a credit score of less than 500, you will likely have to wait until it improves before you will be approved for any home loan.
As well, if you have a credit history that involves bankruptcy, you will be required to wait a minimum of two years before a lender will even consider your loan application.
We suggest learning how to improve your total credit score by following these practices:
Payment History – 35%: Your payment history has the largest impact of 35% on your credit score. Even if you can only afford the minimum payments, it is vital to pay your bills on time.
Credit Usage – 30%: How much credit you currently use is 30% of your score, and is known as credit utilization. The more credit you use, the lower your credit score becomes. Keeping your credit usage under 30% is what we suggest.
Credit History Age – 15%: Known in the industry as Average Age of Accounts, this aspect cannot be changed. Your credit history starts with when you first started a credit account, includes any newer credit accounts, and averages out the age of all your account combined.
Mixed Types of Credit – 10%: A credit report will show a variety of credit types, which can include credit cards, and installment loans. Using a mix of credits is a positive for your credit score and counts for 10 percent of your score.
Total New Credit – 10%: New credit consists of any accounts that you opened in the last 6 months. Adding a new account will affect your credit report by altering the credit history age, so be sure to consider this if you are hoping to get approved for a loan.
How Can You Quickly Improve Your Credit Score?
If you are struggling with how to get a mortgage with bad credit, there are ways to quickly improve your credit score, which will make getting that loan easier.
Increasing Your Available Credit
If you are wanting to improve your credit score quickly, one way to do that is to increase your available credit.
This can be done by paying off debts, or by increasing the limit on your credit account. To increase your limit, most credit card companies take just a quick phone call or click of a mouse for the request, and in many cases, instantly approve the increase.
This will improve your credit score quickly because anytime you are able to reduce your credit utilization, and will improve your overall credit score.
Create New Credit Accounts
One way to increase available credit is by adding new accounts. Doing this also benefits your total credit mix, increasing your credit score.
You can also adjust the account to be bulked together, allowing your accounts to age together, while still increasing your available credit. The benefits of bulking accounts together will show on your credit report around one month after being set up.
More accounts allow you to establish a stronger payment history, which will show when you run a credit check.
However, there are caveats to this, these accounts shouldn't be utilized or maxed out, balances should remain low, there should be some activity on the cards though, and you should avoid simply just opening up a bunch of credit card accounts. For example, if you have a credit card with your bank, and you login to your account and are offered a free line of credit for up to $20,000 and you don't have a line of credit presently, adding this to your portfolio will add diversity to your credit portfolio and establish more payment history.
Have a collection on your credit report has one of the biggest negative impacts. This can be reason enough to decline a loan because it shows lenders that you do not pay back debts.
Paying off a collection due will show as “Paid” on your credit report. This is better than having an overdue collection show up.
The best-case scenario for a collection on your credit report is to have it removed from the report if the money has been paid back. Make sure to get a copy of the transaction before going through with the removal, just to keep as proof.
Doing this will increase your credit score because it will remove that outstanding credit issue, while increasing your chances at being approved for a loan.
Avoid Hard Pull Credit Checks
Applying for new types of credit will affect your credit score. It is good practice to keep inquiries into your credit history to as few as possible.
Having too many checks on your report will make it clear to lenders that you are in desperate need of credit, while it could negatively affect your score.
Be sure to protect your hard work, so if you are trying to get a bad credit mortgage, make sure you find out how their investigation could affect your credit report.
You now have the answers on how to get approved for a mortgage with bad credit. We found multiple options that can allow you to get a loan depending on what your situation looks like.
With a credit score of 500, and a hardy down payment, it is possible to get a mortgage by utilizing other options such as a co-signer.
If you are still trying to figure out how to get a mortgage with bad credit, we have shown that it is a possibility. However, you will have to consider the impact of increased mortgage payments, and interest rates.
While buying a house with bad credit may be tempting, financially it will be better for you, if you spend time on repairing your credit score. This will allow you more selection with lenders, while reducing interest rates, and keeping more of your money in your pocket.
We work with some of Calgary's best mortgage brokers, contact us and let us know about your situation, we'll pair you with the best match and get you started on your journey of home ownership!Posted by Cody Tritter on
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