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Tuesday, 25 February 2020
Agent Resource Center
Agent Resource Center

Buying a Home With Bad Credit: Can You Do It? Should You?

Written by Jaymi Naciri Posted On Tuesday, 21 January 2020 05:30

Only people with the very best credit will qualify to buy a home. Wait—that’s old-school thinking. Today, plenty of people buy homes with scores that are not in the good range (700 or up).

But, poor credit is still one of the top reasons people fail to buy a home—or even try—because they simply assume they won’t qualify. Knowing the ins and out of credit requirements, and a few tricks for improving your credit, could possibly mean the difference between staying in a rental and owning a home of your own. 

What score is required?

This varies depending on the lender and the type of loan, but 580 is today’s magic number. That’s the minimum credit score that is typically required for an FHA loan, although scores can go as low as 500 with a higher down payment. 

How does your score affect your mortgage rate?

In general, the lower the score, the higher the rate. “A low credit score can make it less likely that you would qualify for the most affordable rates and could even lead to rejection of your mortgage application,” Bruce McClary, spokesman for the National Foundation for Credit Counseling, told BankRate. “It’s still possible to be approved with a low credit score, but you may have to add a co-signer or reduce the overall amount you plan to borrow.”

Are there easy ways to raise your credit?

The first thing you want to do once you see your credit report is check for errors. A collection account that was paid off long ago or that’s not even yours could be dragging your score down. “You might have errors on your credit report. If so, they could potentially hurt your credit score,” said Norton LifeLock. “You can get a free copy credit of your credit report every 12 months from each credit reporting company. How? Go to AnnualCreditReport.com. You want to make sure your information is accurate and up to date.” 

Experian Boost is a newer service that allows you to raise your FICO score by getting “credit” for making timely phone and utility payments. According to Experian, the average user raised their score by 13 points, which could be enough to get you over the hump.

Should you spend some time working on your credit before you buy a home?

This is a personal choice. If you can get your score up quickly over a couple of months and the difference will help you qualify, then yes. Your lender should be able to review your credit report and tell you where to concentrate for the biggest and quickest improvement. Then again, if raising your score a few points won’t make a big difference in your rate and you’re ready to roll, you might not have much incentive to wait. 

Keep in mind that the savings over time with a lower rate can be huge. “Even a half-point in interest can make a big difference in your monthly mortgage payment and how much you pay over the life of the loan,” said BankRate. “For example, the difference between a 3.5 percent rate and a 4 percent rate on a $200,000 mortgage is $56 per month. That’s a difference of $20,427 over a 30-year mortgage term.”

What is the best loan for low credit scores?

The aforementioned FHA loan is often the choice of buyers with low credit scores and/or minimal down payments funds. Their criteria is among the most lenient, but you will pay for that leniency. 

“You may be able to qualify for an FHA loan with a minimum credit score of 580 and a 3.5% down payment,” said Business Insider. “However, not all lenders will approve you, as some have higher credit score requirements. Taking out an FHA loan does mean that you'll need to pay mortgage insurance, also known as a mortgage insurance premium, throughout the lifetime of your mortgage. Currently, the mortgage insurance premium on an FHA loan is 1.75% upfront, then 0.7 to 0.85% annually.” 

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