Buying a house with bad credit
Owning a home is an excellent way to build up personal wealth, but if you have no credit or believe you have bad credit, it's understandable to expect some hurdles between you and your dream home. There may be fewer hurdles than you think, though. Some things to keep in mind:
- Your definition of "bad credit" may not be the same as your lender's.
- Credit scores are just one dimension of the application; your 600 is not the same as your neighbor's.
- There are loan options for buyers with a credit-challenged past.
Credit’s impact on lending
When you apply for a mortgage, one of the first steps your lender will take is a thorough examination of your credit history.
- A higher credit score means lenders can likely be more confident in approving a mortgage application since the applicant can demonstrate a solid record of managing debt.
- A lower credit score, on the other hand, can indicate that a borrower has not had a perfect financial past. In some cases, this is an indication of poorly managed debts or haphazard spending, which could indicate greater risk. Lenders may try to mitigate that risk with a higher interest rate.
- Having little to no documented credit makes an applicant a mystery, but it doesn't necessarily put a mortgage out of reach. There are non-traditional credit options that use your payment history to show creditworthiness.
Lenders and credit agencies closely examine your historical financial patterns to assess the likelihood of your ability to repay a loan. A credit score is one aspect of this process, but mortgage lenders dig much deeper for a fuller picture than your score provides.
What is considered bad credit?
By now, it shouldn't surprise you that there's not an easy answer to what is considered bad credit. Here’s a look at how lenders typically view the range of credit scores:
- Under 580 = Needs Improvement
- 580 - 639 = Fair
- 640 - 699 = Average
- 700 - 739 = Good
- 740+ = Excellent
There's a reason "bad" isn't included above: credit scores evolve with the borrower. A score under 580 needs improvement, and it can increase with continued good credit habits. It could be easy to see "good" on a credit score chart and believe anything less would be considered bad, but that's not the case, either. Guaranteed Rate has mortgage options for homebuyers with credit scores of 580 or above, and all mortgage programs are available to borrowers with a credit score of 620 or above, assuming all other criteria are met.
If you had your sights set low and were searching for bad credit home loan options, now is a good time to re-evaluate.
Buying a house with bad credit
If you’re looking to buy a home with bad credit, you may think that applying for a typical mortgage is out of the question. This is not the case. Lenders set the credit scores they are willing to work with, and you do not need a "good" or "excellent" credit score to apply for a conventional mortgage.
Thanks to a few government-backed programs, homeownership could be an attainable goal for some first-time homebuyers with bad credit.
There are a lot of misconceptions around conventional loans, largely due to what people believe is conventional wisdom or common knowledge. One is that you need 20% down to buy a home. Another is that you need to be debt free. And yet another is that you need pristine credit. If the many pieces of conventional wisdom around mortgages were true, we would have far, far fewer homeowners.
- 30-year fixed-rate mortgage: The standard mortgage when people think about homebuying.
- 15-year fixed-rate mortgage: A shorter timeline on your mortgage will usually mean higher monthly payments than a 30-year loan, but it can mean a lower interest rate and having your loan paid off significantly sooner.
- Adjustable rate mortgages: Despite their name adjustable rate mortgages (ARMs) actually start out with a fixed rate. A 10/1 ARM has a rate that's fixed for 10 years and then adjusts based on the market every year thereafter.
Government loans and programs
There are government programs specifically designed to make it easier for people to buy homes under certain circumstances:
- FHA loans are insured by the Federal Housing Administration. While these loans are commonly viewed as mortgages for first-time homebuyers, that's not a requirement. Sometimes it makes more sense for a first-time homebuyer to go with a conventional mortgage or for a seasoned homebuyer to choose an FHA loan. FHA mortgages have different requirements around down payments, credit scores and mortgage insurance than conventional loans, and a loan officer can help you determine which might best fit your needs.
- USDA loans are backed by the U.S. Department of Agriculture and are intended for more rural homebuyers. Before even considering a USDA loan, it's important to check if the property is in an eligible location. USDA loans have no down payment required, but they also feature an income cap based on the location of the property. They don't have private mortgage insurance, but there is a guarantee, or funding, fee paid initially and monthly. As with FHA loans, your loan officer can help you weigh the pros and cons and determine if a USDA loan or a conventional loan is the right fit.
- VA loans provide mortgage options for active service members, military veterans and their families. Provided by the United States Department of Veterans Affairs, these mortgages offer advantages that lower the credit threshold for prospective buyers and require no down payment or mortgage insurance. While the VA sets the mortgage conditions and guarantees the loan, financing is still provided by the lender. VA loans are often the more advantageous option for eligible homebuyers.
In addition to these loans, there are down payment assistance grants and other programs designed to help you buy a home. These programs often vary by state, and you can sometimes find additional support at the county level.
Keep your credit score consistent during your mortgage
It's important to keep your credit and finances consistent during the mortgage application process, especially if you're not confident in your credit rating. While processing your mortgage, underwriters are working to verify your financial information and ensure you'll be able to handle the responsibilities of your mortgage. You should try very hard to maintain your credit rating through the mortgage process, which means
- Don’t apply for new credit
- Don't miss credit card or loan payments
- Avoid making any large purchases
- Don’t switch jobs
- Ensure any significant deposits to your account have a paper trail
If you think a decision might have a negative impact on your credit rating, you should probably avoid it at all costs while your mortgage application is being processed. If you're unsure, speak with your loan officer before making any decisions.
While it might feel like doors close to you if you have a "bad" credit score, the truth is that the vast majority of Americans have a "fair" credit rating or above. Experian reports that only 16% of people have credit scores under 580. See what options are available to you when you apply for a mortgage with Guaranteed Rate.
GUARANTEED RATE IS NOT A CREDIT REPAIR COMPANY, CREDIT REPORTING AGENCY, BROKER OR ADVISOR. You acknowledge that Guaranteed Rate is not a credit repair company or similarly regulated organization under applicable laws, and does not provide credit repair services. Where available, recommendations, tips and education materials are provided to you at no additional charge, and for educational purposes only. The services are intended to provide you with general information and assist you with identifying your options. The information is provided only to enable you to make your own choices about your personal finance, and is not intended to provide, legal, tax or financial advice. We do not provide any services to repair or improve your credit profile or score, nor do we provide any representation that the information we provide will actually repair or improve your profile. Consult the services of a competent professional when you need any type of assistance. You acknowledge that Guaranteed Rate is not a “consumer reporting agency” as that term is defined in the Fair Credit Reporting Act as amended.
Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.
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