Getting a Mortgage with Bad Credit
If you have bad credit and fear you’ll face a loan denial when applying for a mortgage, don’t worry. With a low credit score, you might still be able to get a mortgage. Of course, it will depend on a number of factors, so speaking with a lender is your best bet for determining whether or not you will qualify for a loan. Many lenders will speak with you about your eligibility without putting you under any obligation to apply for a loan.
What Credit Score Do I Need To Buy a House?
First, let’s take a look at the credit score ranges from FICO:
Exceptional credit = 800 and above
Very good credit = 740 to 800
Good credit =670 to 740
Fair credit = 580 to 670
Poor credit = under 580
Even if your credit is poor, you can still purchase a home. Mortgages will have credit score requirements, in addition to other qualification requirements. The minimum credit score required depends on the type of loan. The minimum required score for conventional loans, for example, is 620. However, the FHA loan program allows for credit scores as low as 580. So, if you’re still plagued by bad credit, an FHA loan might be your best bet. However, keep in mind that lenders may have different requirements based on other factors such as your down payment or income.
Purchasing a home with a co-borrower is another option for prospective homeowners with bad credit.
Fixing or Preventing Bad Credit
It is not the end of the world if you have bad credit. Lenders may still be willing to give you a loan if your credit score is not too low. However, because you are more likely to default, you may have to pay a higher interest rate and more fees (fail to pay the loan back). As a result, it is in your best interest to improve your credit score in order to obtain a lower interest rate, which can save you thousands of dollars in the long run.
Mortgage lenders take into account the “age,” dollar amount, and payment history of your various credit lines. That means opening new accounts frequently, carrying large balances, and paying late or not at all can all have a negative impact on your credit score. Changing just one of these aspects of your spending habits can have a positive impact on your credit score.
You can improve your credit score by paying off your debts, paying your bills on time, and disputing any errors on your credit report. However, there are some things you can do to lower your score, so keep this in mind:
- DON’T close an account to remove it from your report (it doesn’t work).
- DON’T open too many credit accounts in a short period of time.
- DON’T take too long to shop around for interest rates. Lenders must pull your credit report every time you apply for credit. If you are shopping around with different lenders for a lower interest rate, there is generally a grace period of about 30 days before your score is affected.
Even if you have reversed your credit history’s downward spiral, you may need to inform a prospective lender that there may be some signs of bad credit in your report. This will save you time because he or she will look at more loans than he would otherwise.
Why Were You Turned Down for a Loan?
If you’re still having trouble getting a loan, inquire with your lender as to why. You may be denied a loan for a variety of reasons, including poor credit. Other possible reasons for a home loan denial include:
- Overextended credit cards: If you miss payments or exceed your limit, that’s a red flag to lenders.
- Failure to pay a previous or existing loan: If you have defaulted on other loans, a lender will think twice.
- Bankruptcy: Filed for bankruptcy in the past seven years? You might have trouble getting a loan.
- Overdue taxes: Lenders check your tax payment record.
- Legal judgments: If you have a judgment against you for such things as delinquent child support payments, it could harm your credit.
- Collection agencies: Lenders will know if collection agencies are after you.
- Overreaching: You might be seeking a loan outside what you can reasonably afford.