Buying a house can seem overwhelming at first. Getting a loan with bad credit can seem impossible, but did you know there are bad credit home loans? You might not be as worried about your credit as you think.
Here are some tips for buying a house with bad credit, understanding your credit score, qualifying for a mortgage, and increasing your score.
Is a bad credit score considered bad by mortgage lenders?
The majority of borrowers do not realize that most lenders do not require a specific minimum credit score to buy a house. There is a catch-22, however, since conventional mortgage lenders can set their own credit score requirements. Despite the fact that government-backed loans provide some comfort to mortgage lenders, they still require a credit score, even if it is usually much lower than that of conventional loans.
You will probably need to focus on improving your credit score first if you have a credit score below 500.
Is it possible to buy a house with bad credit?
According to ExperianTM, one of the three main credit bureaus, anything below a 670 FICO® Score is considered “bad” or “subprime.” Fair scores range from 580 to 669, while poor scores range from 300 to 579. Poor credit isn’t the same as someone else’s bad credit.
In addition to your actual score, lenders will also consider other factors, such as
- A borrower’s down payment availability
- The amount owed by the borrower as a whole
- The borrower’s income
- Any collection debts owed by the borrower
The more of it you can use toward a down payment, the better. You might only qualify for a certain mortgage loan amount based on your credit score. It is still possible to afford the home of your dreams with cash.
All lenders have different requirements, so the lender you choose will also play a role. The interest rates on bad credit loans are much higher, so you should expect to pay a higher monthly mortgage payment.
In the future, you will be able to refinance your mortgage for much better terms if you have bad credit when you purchase a home.
Buying a house with bad credit: How To Do It?
Find out what loan options are available and what the average credit score is.
1. Conventional Loans
A conventional loan does not require a minimum income, credit score, or down payment. A conventional mortgage loan requires a credit score of 620 or higher to qualify.
However, there are exceptions. Even if your credit score is a bit below 620, you may be able to qualify for a conventional loan if your income exceeds the loan amount or if you have a larger down payment than the minimum.
2. FHA Loans
The Federal Housing Administration backs FHA loans. First-time home buyers may find FHA loans very attractive because of their lower qualification requirements.
Credit scores of at least 500 are required for FHA loans.
Additionally, FHA loans have additional qualifications. FHA loans can only be used to purchase a primary residence, for example.
3. VA Loans
You may qualify for a VA loan if you’re a veteran or currently serving in the military.
VA loans are backed by the Department of Veterans Affairs and require no down payment. A one-time “funding fee” may be charged by some lenders.
To qualify for an FHA loan, your home must meet specific standards. While the VA does not have a minimum credit score, most lenders do. For example, Rocket Mortgage® requires a minimum credit score of 580.
4. USDA Loans
USDA loans are backed by the U.S. Agriculture Department. USDA loans allow you to buy a home with no down payment in rural areas.
To qualify for a USDA loan, most lenders require a credit score of 640 and other income requirements.
Mortgage options for buyers with bad credit
If you have bad credit, your best home loan option depends on your score. FHA or VA loans may be a good option if your credit score is below 600.
You should work on improving your credit score before applying for a mortgage. While this may not be the answer borrowers want to hear, it’s the most practical and can save you thousands. Additionally, you might be able to get a loan with a lower income requirement and down payment.
If you have a score of 500 or below, you probably won’t be able to do anything except wait until you raise it. Moreover, if you want to buy a house with a bankruptcy on your credit, you’ll need to wait at least two years for a lender to consider you.
If you understand the following, you can take the necessary steps to improve your score:
35% of your score is determined by your payment history. The main reason people continually say “pay your bills on time” is because of this.
Credit utilization, or how much credit you are using, is responsible for 30% of your score. In general, the more credit you use, the higher your credit utilization, and the lower your credit score will be. You should try to keep your total credit usage under 30%.
Age of credit history:
Your “average age of accounts” is one of the few factors you have almost no control over. You can calculate your credit history by looking at your oldest credit account, new credit accounts, and the average age of all your credit accounts. The length of your credit history accounts for 15 percent of your credit score.
Credit mix/types of credit:
When you examine your credit report, you will find several types of credit. There are two types of loans: revolving credit (like credit cards) and installment loans (like car loans or personal loans). Mixing your credit is good for your score, and it accounts for 10%.
Amount of new credit:
New credit is considered to be an account that is less than 6 months old. When you add a new account, your score will be impacted because a hard inquiry will be made and your average age of accounts will decrease. When applying for new credit, keep in mind that it contributes 10% to your overall score.
The Bottom Line On Bad Credit Home Loans
Even if you have bad credit, you can still own a home. When looking for financing, it might just require additional research. With a government-backed loan like an FHA loan, you can qualify for a mortgage even if your credit score is 500. You might be tempted to buy a home as soon as possible, but it’s better to evaluate available options and interest rates before making a purchase.