Can I Get Mortgage Loans with Bad Credit?
According to The Mortgage Reports, mortgage rates will continue to drop throughout the rest of 2020 and then level out at or just under 3% in 2021. So, now is the time to purchase a home or to think about refinancing your current mortgage loan.
However, it’s important to note that even if mortgage loan rates are low, your credit score will still ultimately affect not only your ability to get a mortgage loan but also to enjoy the lower rates. If you have bad credit, there’s still hope for you, but here’s what you need to know about bad credit and mortgage loans.
How Does Credit Score Affect Mortgage Loans?
Your credit score is a number that’s compiled by the major credit reporting agencies based on various factors, such as credit history, type of credit, payment history, credit utilization rate, and a few other things. Basically, a credit score shows your creditworthiness. If you have a lower credit score, you’re a higher risk for a lender. So, they’re not as likely to give you a loan. Or, if they do, they’re going to slap a higher interest rate on it.
This means that your credit score directly affects your ability to get a mortgage loan. It can either cause you to be ineligible to receive a loan or cause you to have to pay a higher percentage in either a down payment or on interest rates over the full life of the loan. According to Wells Fargo, however, your credit score is just one of the factors lenders look at. They’ll also look at employment history, savings, investments, and other assets.
What Credit Score Do You Need to Buy a House?
The credit score you need to take out a mortgage loan depends on the type of loan you’re taking out and the loan amount. If you have poor credit, try taking a look at FHA loans. The minimum credit score needed to qualify for an FHA loan is 580. With a 580 credit score, you’ll be eligible to make a down payment of just 3.5%.
Conventional mortgage loans, however, are a bit harder to qualify for. At Quicken Loans, for example, your credit score for a conventional mortgage loan must be 620 or higher. Generally, you’ll need a credit score of above 700, though, to qualify for a loan with a good interest rate and a low down payment requirement.
If you qualify, it’s worth looking at Veterans Affairs loans or the United States Department of Agriculture loans as well. While the credit score requirements are similar (580-620 for VA loans and 640 for USDA loans), they offer other types of assistance that might make the mortgage loan process easier.
How Do You Buy a Home with Bad Credit?
If you’re trying to balance bad credit and while looking for a mortgage loan, don’t get discouraged. You can still buy your dream home as there are ways around a poor credit rating. First of all, it’s important to remember that your credit score is only one factor that lenders look at when deciding to approve your mortgage loan application. They’ll also look at:
- Debt-to-Income Ratio. Generally, they want to see that your debts don’t equal more than 43% of your monthly income. If your debt-to-income ratio is low but your credit score is poor due to other factors (such as no credit history or a few missed payments years ago), they might be more lenient with you.
- Down Payment. If you’re able to save up a lot of cash but can’t quite get your credit score up, this can work in your favor. The higher your down payment is, the lower your credit score can be.
- Employment History. Usually, lenders love to see that you’ve worked at the same company for at least two years. So, if you’ve built up a longer work history, let’s say ten years at the same company, this could potentially offset a lower score.
Along with those varying factors, it’s suggested that you work to rebuild your credit while saving up for a larger down payment. If you have bad credit, try to figure out whether it’s more beneficial in your situation to use your savings to pay off some debt to increase your credit score or, if that won’t move your score by much, simply save the cash for a larger down payment.
How to Improve Your Credit Score for Future Loans
Not having any luck with mortgage loan companies? It might be time to work towards rebuilding your credit to apply for a mortgage loan in the future. Some of the easiest ways to rebuild your credit include:
- Paying your bills on time. Don’t get behind on student loan payments or credit card payments. If you’re having trouble paying, contact the creditor to talk about reducing payments.
- Not closing out existing accounts. If you have a credit card that you never use, don’t close it! It’s good to have multiple types of credit open (it’s called credit mix) and it’s good to have a higher amount of credit availability.
- Increase your line of credit. If you’re able to, contact your credit card company and ask if you’re eligible to increase your line of credit. This looks good and as long as you’re making payments on time, it will only increase your credit score over time.
- Avoid hard inquiries. It’s tempting to want to constantly check your credit score, but depending on how you’re doing it, this can cause a hard inquiry to show up on your credit report. And, that’s no good. Avoid applying for new credit cards as they might make a hard inquiry. And, sign up for an app like Float that allows you to monitor your credit score for free without penalties.
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