Homebuyers don't necessarily need perfect credit, especially if you're buying your first home.
Most people think that you need good credit to buy a house. But that’s really only true for traditional, fixed-rate mortgages. If you want a 15-year or 30-year fixed-rate mortgage, then you generally need a FICO score of at least 620 or above. More high-end lending tools, like balloon mortgages and jumbo mortgages, generally require even better credit.
However, on the other end of the spectrum, there are loans specifically designed to help bad credit homebuyers achieve homeownership. You can use lending tools, like adjustable-rate mortgages, to buy a home with a lower credit score. This is especially true if you are a first-time homebuyer. In this case, you can qualify for home loans with a FICO score as low as 500.
|Type of Mortgage||Credit Score Needed|
|Traditional, fixed-rate home loan||620 and above|
|Adjustable rate mortgage (ARM)||Above 600|
*If you have a credit score of 500-579, you must put down 10% of the purchase price of the home to qualify for an FHA loan. If you have a credit score of 580 or higher, you can put 3.5% of the purchase price.
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How to buy a house with bad credit, step by step
- First, you generally need to contact a HUD-approved housing counseling agency for a one-on-one consultation with a housing counselor.
- A housing counselor will be familiar with all the special financing programs available for people with bad credit in your area.
- They will also help you find a homebuyer workshop; taking this course is often required to qualify for bad credit loan options.
- If you take the course in person locally where you live, you can usually find a free course.
- You can also take the course online on your own time, but usually for a fee; online course fees usually run around
- Once you complete the course, you receive a certificate that you can provide when you apply for financing.
- Now you can begin shopping for FHA loans; these are loans financed through Federal Housing Authority.
- Your loan will not come directly from the FHA; instead, you get an FHA loan through the private lender of your choice.
In general, FHA loans only require a FICO score of 560 or more. That’s considered a “poor” FICO score. In addition to allowing you to qualify for loans with weak credit, a homebuyer course completion certificate can also help you qualify for first-time homebuyer assistance programs, such as down payment and closing cost assistance.
What do I need to qualify for an FHA loan?
- An FHA-approved lender
- A down payment of at least 3.5% of the home’s purchase price if you have a 580 credit score
- A down payment of at least 10% if you have a credit score of 500-579
- Extra money to cover mortgage insurance
Anytime someone puts down less than 20% on the purchase of a home, the lender will add Private Mortgage Insurance (PMI). This is basically extra money added to your monthly mortgage payment. You pay until you’ve paid off 20% of the home’s value; then PMI drops off and your payments will be reduced.
What to do if you still don’t qualify to buy a house
If you still can’t qualify, even for an FHA loan, then you need to take steps to make yourself more “creditworthy.” This means taking steps to improve your credit score and decrease your debt-to-income ratio. And, if your FICO score is below 550, it may take as little as six months or less to get where you need to be.
- First your review your credit report to see what negative information is decreasing your score.
- If there are report errors that are contributing to your lower score, you can repair your credit to get them removed within 30 days.
- Then you can implement a strategy to build credit. When you have bad credit, this usually produces results within 6 months.
Often, it’s good to have a tool that tells you where you stand. Credit monitoring and ID protect tools give you access to your three credit reports, plus credit score tracking. This can make it easier to know where your score is, so you know exactly when it’s the right time to apply for a mortgage.
Is a low credit score keeping you from getting approved for a mortgage? Try Self Lender!
FAQ: Homebuying and your credit score
Q:Can I buy a house with a 600 credit score?
Some lenders have also relaxed down payment requirements. If you buy a Fannie Mae backed home, new rules started in 2017 allow you to buy a home with as little as 5% down. Again, you must pay PMI until you’ve paid off another 15% of the mortgage, but it drops off. You can also qualify with a higher debt to income ratio. The previous cut off was 41% or less. Now you can qualify as long as your DTI is between 45% and 50%.
Q:Can I buy a house with a 500 credit score?
Be aware that you will still need to pay private mortgage insurance (PMI) until you have paid off 20% of the purchase price of the home.
Q:Is 700 a good credit score to buy a house?
You should also be able to get a better interest rate with a good credit score. The higher your score, the lower the rate. That means lower interest charges over the life of your mortgage; you essentially pay less to borrow than someone with bad credit.
Q:What credit score is needed to refinance a home?
If you qualified for an FHA loan at a 560 FICO, then a few years down the road your credit score has improved to 700, consider refinancing! You are likely to qualify for a lower interest rate, which could also lower your monthly payments. Just be aware that other factors affect mortgage rates, such as prime rate changes by the Federal Reserve.
If you’re in doubt, ask a lender for a quote or use an online quote comparison tool to get several quotes. This will help you judge where rates are and what you can qualify for now that your score is higher.
Real advice from the experts at LendingTree
This advice isn’t just theoretical. There are real lenders that are willing to work with borrowers who have less-than-perfect credit, to help them secure the American Dream by buying their first home. Here’s a question that we received from a prospective homebuyer who worried that a few past challenges with credit would hold her back. Our friends at LendingTree had this advice to help her become mortgage-ready:
Question: I want to start the home buying process and I have a collections account and a charge off on my credit file both with high balances. One account is almost six years old, while the other is slightly over two years old. I feel stuck and not sure what route to take. Any suggestions/recommendations?
— Tashi in Austell, GA
Advice for buying with bad credit from LendingTree
Collections and charge-offs on your credit report definitely make getting approved for a home loan more challenging, but not impossible. There are three areas a mortgage underwriter will look at when deciding whether to approve you for a new loan.
1. Your credit score
The collection account and charge off are probably dragging your credit score down but by how much?
Different lenders and loan programs have their own minimum credit score requirements. To qualify for conventional loans, you’ll need at least 620 credit score. FHA loans, however, are backed by the government and make it easier for borrowers with low credit scores to qualify. To get maximum financing, you’ll need at least a 580 credit score, but you can qualify with a 500 score if you put 10% down.
If you don’t know your credit score, check your most recent credit card statement. Many major credit card companies now provide credit scores for all customers on a monthly basis. While this may not be the “official” score used by a mortgage underwriter, it should give you a good idea of where you stand. You can also purchase your score from MyFICO.com.
Once you know your score, you can get an idea of your chances of getting approved for a mortgage. If your score is below 500, work on improving your credit score before applying.
2. Your reasons for credit issues
Another factor lenders consider when deciding whether to offer a mortgage loan is whether you have a good reason or explanation for your credit issues.
For instance, did you lose your job or face a medical emergency that left you unable to pay your bills during that time period? If so, your lender will likely ask you for a written explanation.
In your letter, go into detail about all the negative information on your credit report. Explain what happened and why, steps you took to resolve the issue and how you plan to ensure the situation doesn’t happen again. Include copies of any supporting documentation that backs up your explanation.
3. How you’ve handled credit recently
Negative information on a credit report carries less weight than more recent information. You mentioned one of your negative items is almost six years old while the other is over two years old. If you’ve handled your credit well since that time — for instance, had no late payments and maintained a low credit utilization ratio — that will work in your favor.
If you’ve had some more recent missteps, you might want to work on improving your credit score over the next year. Remember, negative information remains on your credit report for seven years, so one of the negative items on your credit report will fall off in the next year. While you wait that out, work on paying down credit card balances and building a track record of on-time payments.
This can benefit you in a couple of ways: you’ll improve your chances of approval and likely receive a better interest rate and other terms from lenders when you do apply.
No matter your situation, you don’t have to navigate the credit rebuilding process alone. Make an appointment with a HUD-approved housing counselor. Many offer homebuyer education programs that include a review of your credit report and an action plan to improve your credit score.
One more tip: don’t try to pay off your old collection account before talking to a housing counselor or lender. FHA loans don’t require that old collection accounts be paid off as a condition of approval. And making a payment toward an old account can restart the statute of limitations on that debt, putting you at risk of being sued by the creditor and having your wages garnished if they get a judgment against you. This could actually hurt your chances of approval, so talk to a HUD-approved housing counselor familiar with the laws in your state before taking action on old debts.
Credit missteps won’t necessarily stop you from becoming a homeowner. Get advice from a housing counselor and work on improving your finances. Not only will you have a better chance of qualifying for a mortgage, but you’ll be more equipped to handle your monthly mortgage payments and cover the other costs of buying and maintaining a home.
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Published by Debt.com, LLC