Lenders That Work with Dangerous Credit score
Buying a home with bad credit makes it harder to realize your dream of owning a property. While it’s a challenge, getting a mortgage with less than excellent credit isn’t impossible. There are also steps you can take to repair your credit and make you more attractive to a lender.
What is considered bad credit?
When people use the term “bad credit,” it refers to their creditworthiness. This is a calculation that measures how risky you are as a borrower. Your financial history includes your track record of on-time payments with credit cards, loans, and other financial commitments. Credit scores are used by lenders to help decide whether to hire you as a borrower.
There are several different credit scores that lenders can use, but one of the most popular is the FICO® credit score. A scale between 300 and 850 is used. The higher the number, the better. If you have a credit score of 700 or more, this is usually enough to get approved for a mortgage. Here’s a look at the FICO® credit score areas:
800 and more = Exceptional Credit
740-800 = Very good credit
670-740 = Good credit
580-670 = Fair Credit
Below 580 = bad credit rating
You can still get a mortgage if you are low on credit. There are other factors that a lender will consider besides your credit score. Your income and your down payment are two examples. The requirements for a mortgage loan also vary depending on the lender.
How to Check Your Credit Score
There are many resources available to help you monitor and check your creditworthiness. Many credit card companies give you access to your credit history by logging into their website or mobile app. The credit bureau’s three reporting agencies, Experian, TransUnion, and Equifax, all provide access to credit scores.
Home loan options for buyers with low credit scores
There are some types of loans for which you can possibly be approved with a low credit score. Below are some options for low loan borrowers.
The Federal Housing Administration (FHA) loan is secured by this government agency. This loan program is designed to help low and middle income borrowers who are unable to buy homes due to poor credit. As long as you have a credit score of at least 580, you can qualify for an FHA loan. You must also be able to pay a minimum 3.5% deposit.
Now there is a tradeoff for the lower credit score and down payment requirements. All FHA borrowers are required to pay an Advance Mortgage Insurance Premium (UPMIP). The current UPMIP is 1.75%. For a mortgage loan of $ 300,000, that’s an additional $ 5,250. There is also annual mortgage insurance, which is usually 0.85% per year.
FHA VA loan
If you are an active military member, veteran, or other qualified group, you may be eligible for a VA loan. With assistance from the U.S. Department of Veterans, you can be approved with a credit score below 620. There is also no down payment or mortgage insurance premium. You must meet the VA eligibility requirements to qualify for a VA loan and receive a certificate of eligibility.
The U.S. Department of Agriculture is the government agency that supports USDA loans. To get this loan, you need to buy a home in a qualified rural area. Your credit score must be at least 640 in most cases to qualify. These loans are aimed at families who demonstrate economic needs. Your adjusted gross income cannot exceed 115% of the median income in the region.
What can I do to improve my credit?
Often times, the best option for borrowers with bad credit is to work on improving their creditworthiness. You have more credit options, lower income, and down payment requirements. A better credit score can help you get a lower interest rate that can save thousands of dollars over the life of the loan.
First, let’s understand the factors that affect your creditworthiness with FICO®:
- Payment History (35%) – This is the biggest factor that determines your credit score. It is your track record of paying your bills on time.
- Loan Utilization (30%) – This is the comparison between the loan amount you used and the loan amount available. It is best to keep your loan utilization below 30% in order to maintain or improve your credit score.
- Credit history (15%) – Also known as the average age of the accounts. This is based on the age of the oldest credit account, new credit accounts, and the average age of all accounts found in your credit report.
- Credit Mix (10%) – If you’ve seen your credit report, you’ve probably noticed that different types of credit are reported. Credit cards are classified as revolving loans, while personal and auto loans are known as installment loans. A mix of these types of loans is good.
- New Credit (10%) – Typically, a new credit account will be considered one that has been opened in less than 6 months. Opening new accounts will lower your credit score and affect your credit age. It is best to open new accounts frugally.
Check your credit report
Lenders use your credit report to view your financial history including bankruptcies and collections. It is also used to calculate your credit score. You can get a free copy of your credit report from any credit agency. Use your copy to review your history and check for errors. If you find a mistake, report it to the credit bureau immediately.
Pay all your bills on time
The impact of a missed payment is too great. Sign up to have all of your bills paid automatically. Even if you forget, you are covered. Budget your money so you can pay your bills when they are due.
Withdraw your credit card
Make a plan to pay off your credit cards faster. This will lower your credit load and improve your credit score.
Do not open or close old accounts
Try not to open too many credit accounts in a short period of time. It makes lenders nervous because it looks like you have a financial problem to them. Even if your first credit card was in a drawer over a decade ago, leave the account open. Closing it down will lower your credit score.