The one thing that many of our first-time homebuying clients worry about is whether or not they qualify for a home loan. The reason for this is the dreaded credit score; those three numbers can make or break the dream.
The worry is overblown for the most part. Yes, lenders rely heavily on the potential buyer’s credit score. After all, it is typically an indication of whether or not the borrower uses credit responsibly, if he or she pays bills on time and how much of a risk the borrower presents to the lender.
There are loans available to folks with less-than-perfect credit. The downside is that you may pay more in mortgage interest, fees and may need a higher down payment.
What’s a good and what’s a bad credit score?
Typically, credit scores can range from 300 to 850. “Although ranges vary depending on the credit scoring model, generally credit scores from:
- 580 to 669 are considered fair
- 670 to 739 are considered good
- 740 to 799 are considered very good
- 800 and up are considered excellent,”
According to the experts at equifax.com. Let’s put the above numbers into perspective. On a loan for $350,000, borrowers with credit scores between 760 and 850 will receive (as of July 2023) a mortgage interest rate that is 1.589 percent less than borrowers with a score between 620 and 639.
So, yes, provided all other stipulations are met (stable employment, income, etc.), you can buy a home if you have bad credit. You will, however, pay more for it than someone with better credit.
Your credit score may not be considered “bad”
Americans with less-than-stellar credit scores, those that fall below 670, are considered subprime borrowers. Learn more about getting a subprime mortgage at Experian.com.
If your score is lower than 579, it is considered “bad.” This is why it’s important to check your score before embarking on the journey to buy a home. It may not be as bad as you think, or it could be worse.
Thankfully, lenders also look at other aspects of your financial situation. These include:
- Your current debt and any delinquencies
- The amount of your down payment
- Your income
There are loans for that
The best route for those with poor credit is government-backed mortgages. These include mortgages backed by the:
- U.S. Department of Agriculture (USDA) Rural Development Department
- Federal Housing Administration (FHA)
- Veterans Affairs (VA)
USDA loans typically don’t require a down payment. The catch is that the home you will purchase must be located in what the department considers a “rural” area. If you have an idea of where you want to live, especially the address of a property, enter it on the USDA Rural Development’s website to see if it is eligible for the program.
The best part of this program, aside from the zero down payment for those who qualify, is that the credit score requirement is quite low: at least 580. Higher scores, however, qualify for the no down payment bonus.
FHA loans are quite popular among those with poor credit scores. The minimum credit score required is 500, although if yours is at least 580, you may only be required to put down 3.5% of the purchase price. Learn more about down payments at consumerfinance.gov.
If you or your spouse have served in the U.S. military, or are a widow or widower of someone who did, check out the mortgages offered by the Department of Veterans Affairs. Available to both veterans and active-duty members of the military, the minimum acceptable credit score is 580.
There is no down payment requirement for those who qualify. Learn more online at benefits.va.gov.
Before you begin the mortgage application process, take a deep dive into your credit reports. Look specifically for errors. Why?
“More Than a Third of Volunteers in a Consumer Reports Study Found Errors in Their Credit Reports,” according to Lisa L. Gill at consumerreports.org. Fixing these errors is one of the easiest and fastest ways to raise your credit score.
“You should dispute with each credit bureau that has the mistake,” suggests the experts at the Federal Trade Commission. Follow the link to read a walk-through of the dispute process.
If all options fail, take the time to save cash. It’s king, remember? And lenders are more likely to approve your loan if you have cash to pay the difference between the price of the home and your loan approval amount.
Poor credit shouldn’t put an end to your homebuying dreams. There are options out there and we’re happy to discuss them in further detail with you.
The information above is not to be considered as financial advice, but is for informational purposes only. We are not financial or mortgage specialists.