Buying a house and your ability to borrow a mortgage loan depends on three factors – your credit score, your debt-to-income ratio, and the stability of your work history. When any one of those factors is less than stellar, you can be disqualified or end up paying thousands of extra dollars in higher interest rates.
Your credit score plays the single biggest role in determining how good a deal you’ll get when buying a house. Scores range from excellent to bad:
• Excellent: 781 – 850
• Good: 661 – 780
• Fair: 601 – 660
• Poor: 501 – 600
• Bad: anything that fall below 500
You’ll get the best terms if you have excellent credit. Anything beneath 620 – 660 makes it difficult to qualify for a conventional mortgage loan of any kind.
All is not lost, though. There are ways around the stringent requirements, and even people with bad credit may be able to get a mortgage loan if they take the following steps.
Put Down a Larger Down Payment
Some lenders will approve you for a mortgage with a bad credit score if you’re willing to put more skin in the game. How much more? At least 20 percent of the property’s value signals that you can handle payments despite a rocky credit history.
There is an added advantage to making such a big down payment. The 20 percent threshold gives you enough equity to avoid carrying private mortgage insurance, which has a higher interest rate. Moreover, in a short period you may be able to use the equity to refinance your home at better rate.
Get a Federally Subsidized Loan
If you qualify for subsidized lending through the Federal Housing Administration, you can start the loan application process with a credit score as low as 500, though you need a score of at least 580 to be eligible for a 3.5 percent down payment. FHA lenders take into consideration the whole picture rather than looking at your FICO score in isolation, which is good news for individuals recovering from Chapter 13 bankruptcy and those with irregular work histories.
For veterans, the deal is even better; qualifying servicemen and their survivors can borrow a VA loan with zero percent money down.
Have Your Lender Look at the Big Picture
When determining if you qualify for a loan, the lender runs your information through an automated program that spits out a numerical conclusion. That conclusion may not be the sum of who you are as a borrower, though. For instance, even though you have a lot of student debt and a poor credit score, you might have such a high future earning potential that the lender considers you an acceptable risk.
Requesting that your lender go the route of manual underwriting means two things. First, you’ll be able to get a loan without factoring in the FICO score at all. Second, you will have to be able to prove that there are special circumstances why a lender should give you the money. Not every lender is willing to do manual underwriting; you’ll have to look for one that does.
Spend Time Repairing Your Credit
If you are not buying a house right away, probably the best option of all is to spend at least six months repairing your credit. According to a spokesman for FICO, the three things you can do to improve a bad credit score the most are “pay all your bills on time, every time, keep your credit card balances low, and only open new credit when you need it.” Adhering to these rules consistently will raise your score gradually over time.
In the meanwhile, you should be proactive. Order copies of your credit report and look at them carefully to make sure there are no mistakes. It also doesn’t hurt to ask creditors to remove negative unpaid accounts from your report in exchange for full or partial payment. Reconciling old debt is a cathartic experience that encourages you to practice better financial habits going forward – and that, too, will have a positive effect on your credit.
About Peak Finance Company
Peak Finance Company is a mortgage banker and broker that specializes in solutions-based lending, currently operating in California, Oregon, and Georgia. The company prides itself on offering a personalized and creative approach to the mortgage-lending process, one that makes it possible to offer loans to individuals in a wide variety of circumstances and at the most competitive rates.