Buying a home makes so much more sense than writing out a check to your landlord every month. But what can you do if you have bad credit? You might still be able to buy a home, but you’ll probably have to pay higher interest rates, and you might have to put down a larger deposit. So, what counts as a bad credit score?
The FICO credit scoring system ranges from a low 300 to a perfect score of 850. If your score is below 640, you might find securing a mortgage loan difficult. If your score isn’t what it could be, here are a few tips on buying a house when you have bad credit.
1. Find out your FICO credit score
Checking your FICO credit score is the first thing to do before you start looking for a house to purchase. You can do so online for free, such as at Credit Sesame, annualcreditreport.com and Credit Karma.
You will have a score from the three major credit bureaus, (Experian - EXPGY), Equifax (EFX - Get Report) or TransUnion (TRU - Get Report). A mortgage lender will take the middle score as an indication of your credit-worthiness. The sooner you find out your credit score, the sooner you can take action to improve your score.
2. Optimize your FICO score
To improve your FICO score, there are a few crucial steps you need to take. Firstly, check your credit reports and dispute an error with the credit bureau concerned. Secondly, pay as much as you can into your credit card accounts to bring the balance down as low as possible.
A low balance owing on your credit cards will produce a higher credit score. Paying down your debts on time, every single time, will score you a better credit profile.
3. Look for low credit mortgage lenders
Not all lenders will make loans to those with low credit scores. However, Federal Housing Administration (FHA) approved lenders offer loans for which the credit score requirement is relatively low at 580, sometimes even 500. They require 3.5 percent of your home’s purchase price as a down-payment, and private mortgage insurance for the life of the loan.
Shop around for lenders that can meet your requirements. A search for Mortgage broker Mississauga, for example, could find you a solution in Canada if you have bad credit. And there are other brokers who could also help you secure your home.
4. Gather a larger down payment
If you can, try to get together a bigger down payment than you are required to. A 20 percent down payment is ideal, but anything above the minimum will help result in a lower interest rate and lower monthly installments. Maybe it’s time to approach that wealthy member of your family who might want to see you have your own home.
5. Look for a cheaper home
If you have bad credit, a mortgage lender would much rather lend you $100,000 than $400,000. There’s less risk with lending a smaller amount of money. Look for a lower-priced starter home or one that needs a little work.
Invest in your home and improve your credit score over time so that you are in a position to buy a larger home, if that’s what you want. A smaller home is good practice in maintenance for when your dream home comes along.
6. Improve your credit score long-term
Opening up new lines of credit can improve your credit score, provided you pay them on time. When considering whether to extend a loan, lenders are encouraged by responsible debt management.
