Can I Still Get a Mortgage With Bad Credit?
It happens, many of us go through periods of life where our credit scores get a bit low. This can be especially frustrating when we are trying to make big purchases like a first home or car. Continue reading to learn more about some potential loan options for those with bad credit, along with ways to increase your credit score and available credit.
Buying a House with Bad Credit + Available Loan Options
Buying a home with a bad credit score may seem impossible, but there are a couple ways around it! According to Experian, anything less than a 670 FICO Score is considered “bad.” Besides your credit score, lenders may also look at factors such as:
- How much the borrower could spend towards a down payment
- Borrower’s amount of debt overall
- Borrower’s income
- Any debts in collections from the borrower
All lenders come with different requirements, so different factors will go into how much you are ultimately paying. You might have to pay a higher monthly mortgage payment, and additional fees could be added on as well. Even if you purchase a home at the time you have bad credit, you still have time to repair the credit and refinance your mortgage later on.
Bad Credit Loan Options
Take a look at some of the various options available for those with bad credit, and the minimum scores required to qualify:
- Conventional Loans: With a conventional loan, there isn’t a set requirement for the income amount, credit score, or down payment. However, it’s important to note that the score most qualify with is a 620 or better.
- FHA Loans: Backed by the Federal Housing Administration, the FHA loan is for a first-home buyer and offers much lower qualifying requirements. The minimum credit score required to get this loan is 500, but you can use a FHA loan only to purchase a primary residence.
- VA Loans: to qualify for a VA loan, you must be a veteran or currently serve in the armed forces. With the loan, you can purchase the home for a $0 down payment.
- USDA Loans: The U.S. Department of Agriculture supports this final loan. A loan from the USDA will allow you to buy a home residing in a rural area with a 640 minimum credit score.
Unable to Get a Loan with Bad Credit?
For many, the best option for those with bad credit is to take the time and repair the credit score before dealing with mortgage options. It might not be what potential buyers want to hear, but it can help you save thousands in interest payments.
Major factors to consider that influence credit score:
- Payment history: Your payment history is responsible for up to 40% of your credit score. This is why it’s so important to pay your bills on time!
- Credit utilization: The amount of credit you are using at the moment is also known as your credit utilization. Credit utilization is responsible for 30% of your score, and the more credit you use results in higher credit utilization. Higher credit utilization results in the lower your score can become. It’s most commonly advised to keep your total credit usage under 30%.
- Credit age: Your credit history is considered the “age” of your oldest credit account, new credit accounts and the average ages of all the accounts on your credit report. The length of your entire credit history can make close to 15% of your total score.
- Mixes of credit: You’ll notice that there are a few different types of credit when you look over your report. These can either be from revolving credit or installment loans. Having a mix of credit is a good thing for your score!
- New credit: If you’ve had an account for less than 6 months, this is usually considered having new credit. Your score will be influenced whenever you add a new account because it will give you a hard inquiry and decrease your average age of accounts. It’s important to note that applying for new credit does contribute to 10% of your overall score.
Down Payment Assistance
Bad credit will typically go hand in hand with a higher down payment. Many buyers wish to boost their down payment to compensate for the bad credit, and fortunately there are over 2,000 down payment programs across the country to help you get to where you need to be!
Increase Available Credit
Once you have worked on improving your total credit score, it wouldn’t be a bad idea to focus on raising your available credit. This will help you to increase your credit by also decreasing credit utilization. Here are some ways to increase your available credit:
- Add new accounts: Adding new accounts also means you’ll be increasing available credit and increasing your overall credit mix. This change also allows you to establish an even stronger payment history on your credit report.
- Pay off debt collections: One of the worst things for your credit is to have outstanding debt collections that have not yet been paid. Pay those off as soon as possible so your lenders don’t become aware!
- Use a co-signer: Depending on the type of mortgage, you might be able to qualify for a home loan with a co-signer. A co-signer can help you bump over the credit threshold, because the co-signer’s income and assets will be considered along with yours. You could also qualify for a larger loan amount with a co-signer, even with bad credit! If multiple borrowers are getting a loan by Fannie Mae for example, lenders are able to average the median scores of the borrowers.
Explore Options + Take Everything One Step At a Time
All in all, a bad credit score does NOT go hand in hand with being unable to receive a mortgage. Take a look at some of the available loan options already listed, and remember those factors that go into influencing a credit score. Good luck, and don’t feel like you have to rush the process!
