Fixing Your Credit to Buy a House

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fixing your credit to buy a house

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Buying property is undoubtedly stressful no matter your financial situation, but it can be especially difficult if you have poor credit. Experts agree that in order to qualify for a standard mortgage, the minimum credit score is 620, which still doesn’t make any guarantees depending on the details of your report. 

In the US as of 2021, the average VantageScore was 695, which isn’t that much higher than the required 620. That means many people out there may be struggling to secure the mortgage that they’re looking for. 

People with lower credit scores may be worried after seeing these statistics, wondering if it will ever be possible to buy a home. 

Fortunately, it is possible to buy a house with below-average credit. There are many factors which go into approval for a mortgage application apart from credit score, in fact, which is beneficial in many cases. 

In this article, we’ll discuss the different factors that affect mortgage approval and how you can use them to your advantage when seeking to purchase a home. 

Can You Buy a House with Bad Credit? 

As we mentioned above, 620 is the starting score for conventional mortgage approval. Even still, the “minimum” isn’t necessarily a requirement due to the fact that a handful of other elements will be considered along with your application. 

When you shine in other areas on the application, the low credit score may not make the final determination. 

Credit history, of course, does play a role in your home loan approval. If you miss your payments or make late payments, it will likely be noted on your credit report, which can cause a red flag for lenders. 

Lenders would prefer to work with borrowers that have a strong payment history, so if your credit report shows many missing or past due payments, you may want to work to rectify this as quickly as possible for best approval odds. 

If you’re not sure how you can do that, consider working with a credit repair service like Cred Increase. They have worked with many clients to prepare their credit report with effective action plans that can get you ready to apply for a mortgage. 

Aside from that, below you’ll find the main factors that lenders consider when you apply for a mortgage: 

  • Income: A large factor in home loan approval is how much money you have coming in every month. On top of your other bills, lenders want to be assured that you will be able to manage your monthly mortgage payments without issue. 
  • Debt-to-Income: Another vital factor that lenders consider for home loans is your debt-to-income ratio, also called DTI. This illustrates how much of your income is needed to pay off debts every month. If you have a high DTI, it signals to lenders that you live beyond your means and the additional debt of a mortgage would be a strain. For that reason, it’s important to lower your DTI before applying for not only a home loan, but any sort of loan.
  • Savings: Having a large sum set aside as savings is a good sign for lenders. This helps them feel comfortable that even in the event of unforeseen circumstances, you’ll still be able to cover the expense of a mortgage. 
  • Down Payment: The more you put down on a mortgage, the more likely you are to be approved. When you make a larger down payment, the lender minimizes their risk because they are financing less. Your application can look much more appealing with a down payment of 10% or more. 
  • Employment History: A stable employment history with longer employment periods shows that you have had a consistent income stream for a period of time. Lenders would rather see this over many short jobs or gaps in employment, which can cause uncertainty from the lender’s perspective. It’s advisable to avoid switching jobs before you buy a home for consistency, when possible. 

5 Ways to Get a Mortgage with Bad Credit 

Now that we know some of the factors considered when applying for a home loan, we’ll learn how to get a mortgage with bad credit through five action items. Before we start, though, it’s vital to understand two key things. 

Number one: don’t go for deals with “guaranteed” approval for home loans. This is a predatory lending practice that promises anyone, regardless of their credit score, a mortgage. No matter what, these lenders will still have to review your financial status and determine if you’ll be able to repay your loan. 

With a guaranteed approved loan, the only thing that you’ll be guaranteed is a mortgage with extremely high borrowing costs that will end up becoming too much to bear. 

Number two: unless you’re paying down debt or taking steps to improve your credit, it’s extremely important that you don’t make any big financial changes while working on obtaining a mortgage. 

This includes things like getting a new car, making large purchases or withdrawals, closing out credit cards, taking out new loans or lines of credit, and changing jobs. 

Now that we have hit those two points, let’s check out the five things you can do to get a mortgage with bad credit. 

1. Offer a Larger Down Payment 

As you saw above, paying more upfront will minimize risk to the lender and make you a more attractive borrower. You will be borrowing less from the lender as a result, which helps them to see value in closing the deal. 

A significantly higher down payment will increase your odds of approval for a home loan even despite having a bad credit score. 

It can be difficult to come up with a large down payment unless you’ve saved diligently over time, and you’re not alone. According to Forbes, 68% of renters confirmed saving a down payment was the main obstacle to buying a home.

The good news is that help is available. You can find down payment assistance programs that operate both at the local and state level to help would-be homeowners in the buying process. These programs may be beneficial to you in acquiring a larger down payment. 

2. Look Into Bad Credit Home Loans 

If your credit score is below 575, you could consider using a bad credit loan. Although these loans typically involve higher interest rates, you can use them to improve your credit score and rebuild your credit before applying for a mortgage. 

3. Compare Different Mortgage Offers 

Bad credit can cause you to have difficulty in finding acceptable terms. More often than not, even with bad credit you’ll be able to find a mortgage that you’ll be approved for. The biggest problem, then, is the inflated interest rate and predatory lending practices. 

While it can be attractive to grab the first approval you receive through sheer desperation, keep in mind it probably won’t be the only one you’ll get. The best thing you can do is to compare mortgage offers, looking diligently at the rates and loan terms to get the optimal one for you. 

Keep in mind: you need to avoid hard inquiries on your credit report when possible. After a lender gives you approval for a home loan, they will conduct a hard inquiry to investigate your credit. 

Just one hard inquiry won’t hurt your credit more than a few points, and it will bounce back up in a few months. 

When you have more than one hard inquiry over a short time span, your credit can take a pretty significant hit. This will decrease the chances of you getting the mortgage approval with the best interest rate. 

Lenders will never perform a hard credit check without your consent— they require your permission. Thus, the best thing to do when shopping for mortgages is to get preapprovals through the comparison process. 

A preapproval won’t hurt your credit score because they only run a soft inquiry. Once you’ve gotten all of the preapproval results, you can make the best choice and allow one lender to run a hard inquiry. 

4. Use a Cosigner 

If you have someone of confidence that will work with you, you could consider using them as a cosigner on your mortgage. This is a good option if you can’t get approved or don’t believe you can find appropriate loan terms on your own. 

A cosigner helps you in the sense that the lender will also look at their credit during the mortgage approval process. In essence, the cosigner is like a “backup” that vouches for you; if you don’t pay your mortgage, they will be responsible. 

Having a cosigner with good credit can help to neutralize your bad credit and get you a better offer for your mortgage. Keep in mind, however, that they will have to assume responsibility for your debt if you don’t pay it. This makes it a big favor to ask and can cause strain on relationships when trouble arises. 

5. Explore RTO Options 

Lastly, you can find your way to home ownership through rent-to-own (RTO) options. This type of home loan option works when you first sign a rental agreement on a property. You’ll have the chance to purchase the property at the end of the lease, and a part of your rent will be allocated to the possible home purchase. 

RTO may sound attractive, and the option does come with benefits. That said, the process can be  complicated and there could be disadvantages, so be sure to research before deciding on RTO as your go-to option. 

Home Loans for Bad Credit Scores 

In the previous section we discussed home loans for bad credit scores. There are a variety of different loan options out there designed to help those who struggle with homebuying due to low credit. 

Here we’ll review four: 

  • FHA Loan: Those with credit below 580 could qualify for the FHA loan with just 3.5 percent down. These loans are backed by the Federal Housing Administration and aim to assist borrowers in low to middle income brackets acquire a home loan. If your credit is between 500 to 579, you can still take advantage of the program, but need to put down 10%.

Keep in mind that there are other requirements for an FHA loan, including DTI, income and proof of employment, and the home must be your primary residence. 

  • USDA Loan: Although the USDA loan doesn’t require a minimum credit score, you’ll likely need a score of 640+ for approval. These loans are meant for low-income earners, and are offered by the U.S. Department of Agriculture with no down payment required. 
  • Non-Conforming Conventional Mortage: There are loans out there that don’t abide by the guidelies of Fannie Mae and Freddie Mac, which are known as nonconforming loans. These loans will generally offer higher interest rates but bypass the standard credit score requirement. If you have poor credit, this may be an option that works for you. 
  • VA Loan: You can get a VA loan if you are active military personnel, a veteran, or a spouse of either of those. There are no minimum credit score requirements, so they are a prime option for individuals even with a score below 580.  

5 Tips to Improve Your Credit Score for Higher Chances of a Mortgage Approval 

No matter if you’ve started your mortgage process or are just considering it, there is plenty of time to make positive steps to credit improvement. Taking these steps will help you to increase the chances of mortgage approval with bad credit. 

The 5 things you should begin doing immediately are as follows: 

1. Pay Your Bills 

35% of your credit score is made up of your payment history, which is the largest of the five contributing factors. Missing a payment or making even one late payment could lead to a dip in your score. Alternatively, having a strong payment history of on-time payments works very much in your favor, especially when you have a lower DTI. Paying down debt and doing so on time can improve your score in a big way. 

2. Follow a Budget 

There are many fees associated with buying a home, and unfortunately it is expensive. It’s important to create a budget from the get go so that you’re not left scrambling at any time during the process. It needs to be a priority. 

Ensure that you have enough allocated to your current debts and responsibilities as well as a fund for the down payment, closing costs, additional fees, etc. 

It’s even better if you have a strong savings account, increasing your appeal to lenders. This shows them that you can pay no matter what happens. 

3. Check Your Credit Report 

You are able to access your credit report for free once a year from all three major credit bureaus, and many other third party services can help you access it as well. 

It’s important to stay up-to-date with your credit report and understand what’s on it. That way, you’ll have a better idea of your chances of being approved for a home loan. You can also track movement and new additions for accuracy. 

4. Keep Your Credit Cards Open 

There are two things that can happen to your credit score when you close your credit cards. The first thing is that your credit history will be lowered. 

In addition, because the account is closed and no more credit is available, it will cause your credit utilization to spike, another important piece to your credit score. It’s better to keep your cards open at least until you have secured your mortgage.  

5. Work with a Credit Repair Company 

If you know your credit needs attention, there are professional services that will assist you in building your credit back up to an acceptable point. 

Professional credit repair experts are able to identify mistakes, file disputes on your behalf, and create customized action plans to help your credit increase as quickly as possible. They will also educate you on how to maintain a healthy credit score. 

Get help towards fixing your credit today and start working with Cred Increase. Rebuilding your credit and not having to worry about approval odds for home loans with bad credit is the best thing you can do for yourself. 

By jerpy

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By jerpy

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