Qualifying for a Home Loan – What can I do if I have Bad Credit?
Buying a home is overwhelming on its own, and having bad credit can make it seem impossible to even start the process of requesting a loan. But don’t give up! There are a lot of options for people with underwhelming credit to purchase a house. Let’s take a look at understanding your credit score, home loans you may qualify for, and most importantly, increasing your credit score.
What is considered a Bad Credit Score when applying for a Home Loan?
Believe it or not, there isn’t a specific minimum credit score mortgage lenders look for. A conventional lender has the freedom to set their own guidelines and requirements. Most often though, if a credit score is lower than 500, the first step you may need to take is increasing your score. Let’s dive into this first.
Tips on Improving Your Credit Score – and Understanding It
This may be a frustrating first step but in the long run it can save you thousands of dollars in interest payments, give you more mortgage options with lower income requirements and lower down payments. We want to ensure you’re getting the best bang for your buck! Before you start improving your score, lets understand it:
Payment History is responsible for 35% of your score. That’s why it is paramount that you pay your bills on time.
The amount of credit you are using, also known as your Credit Utilization, is responsible for 30% of your score. The more credit you’re using, the higher your credit utilization, the lower your score can become.
Age of Credit History (15%) is most often referred to as your Average Age of Accounts and is one of the few factors you have almost no control over.
Types of Credit (10%) – you’ll notice that there are a few different types of credit on your report. Those can be revolving credit (credit cards) or installment loans (car loans or personal loans). Having a mix of credit is a good thing for your score.
Amount of New Credit (10%): – having an account less than 6 months old is usually considered having new credit. Your score will be impacted whenever you add a new account because it will give you a hard inquiry and also decrease your average age of accounts. Be mindful when applying for new credit.
Now that you have a grasp on what your credit score is, there are several ways you can make that number bigger.
- Increase Your Available Credit. You can do this by either paying down balances or making a credit limit increase request. The reason this helps increase your score fast is that you will mostly be decreasing your credit utilization, which is a huge factor in determining your credit score.
- Add New Accounts. By adding accounts, you are increasing your available credit, in turn increasing your overall credit mix (i.e. Types of Credit)
- Pay for Credit Report Deletions. It is extremely important you do not have collections on your credit report. Make sure to pay off the collection, and then request the items are deleted from your credit report.
- Avoid Hard Credit Inquiries. Before applying for a new credit card or loan, ask a lender if they are doing a “hard pull” or a “soft pull” on your credit to make sure you protect your score.
Buying a Home with Bad Credit – Can You Do It?
Credit scores are complicated, and to complicate things further, your bad credit score is not the same as the next guy’s bad credit score.
Because no two situations are the same, lenders consider all of the following factors when you apply for a loan:
- Debts in collections
- Overall amount of debt
- How much is available for a down payment
That last one can be a loan-saver. If you have bad credit, but a lot of cash in your bank account, the more you have for a down payment. This is a positive! Your credit score might only qualify you for a certain amount of the home you’re applying for but if you can cover the difference with cash, you could still afford the home you want.
Home Loan Options If You Have Bad Credit
There are two primary mortgage loan options available for people with low credit scores – Conventional Loans and Government Loans. The main difference is government loans are insured by the federal government, giving lenders a piece of mind. Let’s dive into some of your loan options.
To qualify for a conventional loan you usually need a 620 credit score or higher. Sometimes this varies if you have more income or offer a higher down payment and can make qualifying much easier.
An FHA loan is a loan backed by the Federal Housing Administration. If you’re a first-time home buyer or haven’t purchased a home in over 3 years, you could qualify. The minimum credit score required is normally about 580. You could get approved if your score is between 500 and 579 if you are able to make a 10% down payment.
VA Loans are backed by the Department of Veterans Affairs for retired military or active-duty members. A qualifying service member and spouse can use this type of loan with $0 down.
This is another type of loan backed by a government department, specifically the U.S. Department of Agriculture. Most lenders require a 640 credit score to qualify but allows you to purchase a home for $0 down. Your lender may have other specific requirements to qualify so it’s important to to clarify those before making any decisions.
Not sure if your credit score makes the cut for your dream home? Coldwell Banker Carroll Realty experienced realtors can help make your dream a reality. Our caring, local agents will be there every step of the way when helping you buy a home. We have real estate agents throughout Panama City, Panama City Beach, and 30a ready to answer any questions you may have! Contact us today to find your forever home.