Your credit score is one of the key factors that mortgage lenders consider when you’re applying for a home loan. But if you find yourself on the lower end of the credit score spectrum, don’t worry – homeownership could still be a reality for you. With rent on the rise and home values increasing, 2017 is a great year to buy a home. So don’t let poor credit keep you out of the market. Here are some tips for approaching the mortgage process if your credit score is lower than you’d like it to be.
Know What Score You Need Your credit score affects whether you can get approved for a mortgage as well as what your interest rate will be. Higher credit scores will generally give you more mortgage options. At Quicken Loans, a credit score of 660 or higher will give you a wide range of options. If you’re interested in a conventional loan, you’ll need a minimum credit score of 620. However, you can qualify for an FHA loan with a score as low as 580.
Discuss Credit Issues with Your Mortgage Lender Talk to your mortgage lender about your credit score. Perhaps your credit score is a result of identity theft or previous challenges that no longer affect your financial stability. Be sure to have your payment records and other documentation beside you to help verify your case for a home loan. Get Credit Errors Fixed Carefully review your credit report to ensure its accuracy.
Keep in mind that the balances shown may be slightly off due to recent payments that have not yet been recorded. If you do find an error in your report, you can send a written dispute letter to get it fixed. This is worth the effort as it could raise your credit score and open up more loan options to you. Review These Options for Buyers with Poor Credit Make a Larger Down Payment You may have the option to compensate for your low score by putting more money down.
This makes you less risky to your lender as you’ll have more invested in the home and be less likely to walk away from it. If you don’t have the cash for a large down payment on hand, look for assets that you can liquidate without taking large losses. For example, your retirement account could be a source of cash for your down payment. Another way to fund your down payment is with gift money from relatives.
However, the amount of gift money you use can actually affect the mortgage type for which you qualify. Learn more about how using gift money impacts your loan approval with our guide to using gift money for your down payment. Take a Higher Interest Rate If your score is high enough, you can apply for a mortgage now and accept a higher interest rate. If you rebuild your credit over the next few years, you may be able to refinance your home at a lower interest rate.
One thing to keep in mind is that you have no guarantee that lower interest rates will be available when you’re ready to refinance. Get an FHA Loan You can qualify for an FHA loan with a score as low as 580. An FHA loan may also be beneficial because it allows for a co-borrower who does not reside in the home. This means that a trusted friend or relative can cosign your loan so you can become a homeowner.
Rent and Rebuild Your Credit Score If now isn’t the right time for you, another option is to rent for a couple more years while you rebuild your credit score. Paying more attention to your finances is essential to improving your credit score. Mint.com is a popular tool for people who want to do just that. It’s a web-based application that aggregates your financial information and allows you to set up alerts, create budgets and track investments for free.
Don’t let a low credit score stop you from investing in a home. First, find out where your credit stands with a free credit report from QLCredit. Then, talk with a Home Loan Expert to see what your options are. Subscribe to Zing! blog Want to impress your friends and family with the knowledge we'll drop on ya?If so, subscribe now for tips on home, money, and life delivered straight to your inbox.
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Posted 07/12/2017 by Erik Sherman Erik Sherman has written about business, technology, and personal finance for the Wall Street Journal, Newsweek, New York Times Magazine, Forbes.com, Inc.com, and many other publications. Share This Page As Seen On Erik Sherman The Mortgage Reports Contributor Getting A Mortgage When You Have No Credit First-time home buyers face challenges that more experienced home buyers do not.
For example, a first-time home buyer may not be able to show the same stable work history that a more experienced buyer can show; and a first-time home buyer not have as much money saved. But, perhaps, the biggest difference between a first-time home buyer and an experienced one is that first-time home buyers are less likely to have credit history. First-time home buyers have had no mortgage, may own their car outright, and may reach for debit cards over credit cards when given the chance.
These three traits put first-time buyers "off the credit grid" and can make getting mortgage-approved a bit of a challenge. [embedded content] Call it the unintended consequence of debt-free living: with no visible evidence that you've managed credit accounts in the past, mortgage lenders become (rightfully) nervous about your ability to repay on a loan -- there's no history for them to go on. Thankfully, you don't need a traditional credit profile to get mortgage-approved.
The FHA mortgage is available to first-time home buyers with "thin credit" or no credit whatsoever; and FHA-backed mortgages are available from nearly every mortgage lender. Verify your home buying eligibility (Feb 19th, 2018) What Is A Credit Report? A credit report is a written account of all creditor accounts which belong, or have belonged, to a person in their lifetime. Credit reports are a compilation of information from credit bureaus, which are companies to which creditors report borrower payment history on a regular basis.
In the mortgage space, there are three main credit bureaus -- Experian, Equifax, and TransUnion. Each bureau uses the information available to it to assess your individual credit score. A credit score is a numerical representation of the likelihood that you'll stop paying on your mortgage. The higher your credit score, the more likely you are to make payments. The algorithm which uses your credit report to determine your credit score is cloaked; we don't know how each line item affects the final score.
However, we do know that your payment history is the single biggest factor in determining your credit score. It's why first-time home buyers rarely have credit scores that are "excellent". There's just not enough history of managing credit and making payments to make that kind of determination. It's okay to have less-than-perfect, though. It's even okay to have no credit. As a first-time home buyer, you can still get mortgage-approved.
Verify your home buying eligibility (Feb 19th, 2018) FHA Mortgages Don't Require "Traditional" Credit First-time home buyers tend to carry credit scores which are lower than the general population. Often, this is because first-time buyers have only a short history of managing credit, and payment history is the largest component of a person's credit score. The solution, though, is not to go out and get a credit card or two; or open up a car loan.
This would actually do more harm than good to the credit score. Seeking new credit lines is a negative in the credit bureaus' credit score algorithms and, besides, until 12 months of payment history exist for each of the new accounts, the effect on a borrower's credit score is heavily muted anyway. The better, faster solution is to seek out mortgage loans meant for borrower with little or no credit to their name.
The FHA mortgage is one such option. As the FHA loan's sponsor, the Federal Housing Administration, states on its website: "The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application." Instead of turning away borrowers who have not had a chance to build a credit history (or who have preferred not to), FHA mortgage guidelines instruct lenders to look at all aspects of a mortgage application.
This is good for first-time home buyers because FHA loans allow for a low down payment of just 3.5%, which can help a household with good income but less-than-optimal savings move from renting into homeownership. And, there's a large market for this type of loan, too. Some estimates put the number of credit-lacking consumers at more than 5 million nationwide. Don't let your lack of a credit score discourage you from purchasing a home.
There are ways forward. What Are Today's Mortgage Rates? Via the FHA mortgage program, first-time home buyers don't need to show credit history -- or even an active credit score -- to get approved for a mortgage loan. Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores. Verify your home buying eligibility (Feb 19th, 2018) Erik Sherman The Mortgage Reports Contributor Erik Sherman has written about business, technology, and personal finance for the Wall Street Journal, Newsweek, New York Times Magazine, Forbes.
com, Inc.com, and many other publications. The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.