Buying A Home With A Low Credit Score
Defaulting on a previous loan, carrying significant debt, or missing a series of payments can all have a negative impact on a person’s credit score. While buying a home with a medium to low credit score is still less than ideal, there are more avenues than ever for those with a low credit score to become homeowners. The following tips can help guide potential buyers with low credit scores through the loan application and approval process.
Check your credit score
There are a number of websites that allow consumers to check their credit scores for free. Checking your own credit score does not count as an outside credit check and will therefore not effect your score. There are three major bureaus that evaluate credit scores; lenders often use the median, or middle score, to determine a borrowers credit worthiness.
Fix errors on your credit report
Credit reporting is not perfect. Many borrowers are surprised to check their credit and find there are several errors on their credit report. Consumers can dispute everything on their credit reports, from old addresses to late payments. Having errors fixed usually can help improve a person’s overall credit score; improving a score by even 10 or 20 points can make a big difference to a low credit score.
Maximize your FICO scores
In addition to disputing errors, there are several other ways to maximize your FICO score. First, pay down the balance on any credit cards to improve your credit utilization ratio. For example, if you owe $600 on a credit card with a $1000 limit your credit utilization ratio would be 60%, which is considered high. Paying down the balance improves this ratio and can improve your credit score. Likewise, try to have any collection accounts removed; while paying a collection amount itself does not improve your credit score, many creditors offer “pay to delete” programs.
Look for low credit score lenders
Some lenders specialize in finding loans for low credit score applicants. FHA loans, for example, allow borrowers with credit scores as low as 500 to purchase a home with as little as 10% down. For those with credit scores above 580, FHA loans only require 3.5% down. Because lenders are able to set their own terms and requirements, borrowers may need to contact multiple lenders before finding one that can work with their credit score.
Show financial stability in other ways
If you have a bad credit score, there are other ways to show a lender you’ll be able to make the monthly mortgage payment. Being able to make a large down payment can reassure lenders – and help reduce the costs associated with PMI, or private mortgage insurance. Likewise, having no late payments in the last 12 months shows lenders you are re-establishing your credit history – even if your score doesn’t yet reflect that. Finally, having a low debt-to-income, or DTI, ratio can reassure lenders you can afford your new mortgage. Most lenders look for a DTI that is 43% or less; this lowers the risk that the borrower will not be able to afford payments and default on the loan.
Buying a home with a low credit score may be more difficult, but it is not impossible. Taking the time to review your credit score, fix errors, and rebuild credit history can all help improve the odds of being approved for a loan.
by Author, May. 23, 2019