Investing in a home is a major milestone for most people. The property might be eventually passed down through the generations. To purchase a home, however, buyers must qualify for a loan or mortgage. Buyers with bad credit may be wary about their chances with lenders, but there are ways to secure a loan with a low credit score.
- Be Honest
Borrowers should always be upfront about their credit situation as they sit down with lenders. Discuss the situations surrounding the credit score. Currently, bad credit is often defined as a score that’s less than 670. Ideally, borrowers want a score that’s above 700 and closer to 850.
Speak about a bankruptcy that affected the family or a collection issue. All of these items will be listed on credit histories, so it’s always better to explain the reasons behind the issues. Some lenders will take borrowers’ explanations into consideration as they mull over a potential loan.
- Shop With Various Lenders
Think of a mortgage as a big-ticket purchase. Borrowers won’t visit only one car dealership to buy a dream vehicle, for example. This same concept applies to home loans. Apply for at least two or three different loans with various lenders. The banks are in competition with each other, which means that borrowers have a chance at a reasonable loan. Multiple applications won’t hurt the credit score at this point either. It takes some time for the hard credit pulls to show up on the history.
- Save up a Solid Down Payment
Getting a mortgage with less-than-perfect credit requires a good down payment. Financing 100 percent of a home’s cost just isn’t possible. Although the general rule for down payments usually revolves around 20 percent, lenders can work with borrowers in order to make a reasonable plan. Try to save up as much as possible because the down payment reduces the amount that has to be ultimately financed. It’ll save a family a lot of money over the years.
- Understand the Interest-Rate Factor
It’s possible to be approved for a mortgage with fair to poor credit, but be aware of interest rates. Borrowers with low credit scores will pay higher interest rates. This fact is due to the risk seen by lenders when they loan out to borrowers with poor credit scores. If borrowers can afford the interest rate matched with the principal, this reality may not impact the personal finances too much. However, interest adds up to thousands of dollars over the years. Refinancing it in the future, for example, might be an option when credit scores are better. A new interest rate at a lower price is possible then.
- Improve the Credit History
Borrowers cannot go back in time to improve their credit histories, but they can clean them up. Each year, every consumer is allowed one free credit history. Download the history and carefully read through it. Pick out any discrepancies. Contact creditors about these discrepancies so that they can be removed from the history. A bankruptcy that’s older than 10 years, for instance, should be wiped from the report. Remember that nobody’s credit history is perfect. Every borrower should have an accurate picture of this history, however. These truths will help lenders with a mortgage decision.
- Research Government-Backed Loans
Lenders may be hesitant about loaning money through a conventional mortgage. A defaulted loan costs them money. Ask about government-backed loans, such as FHA. The lender doesn’t take on any risk with these loans because the federal government guarantees the amount. Borrowers with low credit scores, as a result, can qualify for these loans in most cases. Appeasing the lender is the best route toward an approved loan.
- Consider Co-Signers or First-Time Buyer Programs
People with bad credit may simply not have much history to their reports in the first place. To qualify for a mortgage, ask about cosigners or first-time buyer programs. A cosigner is a person who will guarantee the loan if the other party defaults. This person might be a parent or other relative.
First-time buyer programs are designed to get people into homes with little to no credit. Paying the mortgage off over time is how the credit score will improve.
When a home loan isn’t possible right now, don’t give up on the homeownership dream. Take some time to improve that credit score. Keeping up with other payments and lowering debt will take time to reflect on a person’s history. At some point, a home mortgage will be possible and dreams can come true.