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The Guide to Getting A Home Loan with Bad Credit

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If you’re wondering about your eligibility for a home loan with your credit score, then you’re not alone. There are millions like you. It’s a fact that a good credit score presents you favorably in the eyes of the lender; you’re perceived as less of a risk. Does this mean that people with credit ratings that aren’t really sterling can never hope to own a house? No. On average, an American household has credit card debt of more than $15,000.

Learn how to boost your score and get in the best financial shape possible to purchase a house.

Mortgage lenders and banking institutions will ask for your credit score. The five most important factors that will influence credit score are your payment history, debt-to-credit-ratio, length of credit, credit mix, and the age of different credits. Of these, the first two carry maximum weight when computing a credit score

Your payment history matters a lot. Timely payments ensure that your credit score does not take a hit. A delay of even 30 days can lead to a drop of more than 100 points on a credit score of 780.

Keep the debt to credit utilization ratio at around 30%. The ratio is essentially the debt on credit cards divided by the credit limit on those cards. If you exhaust credit limits regularly, it will reflect poorly on the credit score.

A long credit history is an advantage. Don’t close your oldest bank account. Maintain it even if it has zero balance.

A diverse credit mix helps credit score. Credit cards, installment loans, vehicle loans, etc. add diversity to the mix.

Avoid opening new credit accounts. When you open a new credit account, it lowers the average age of your credit history. Also, every time you open a new account, you take a hit of around five points on your score.

A credit score of 740 and above is desirable to benefit from the best available interest rates. 850 is the perfect credit score. But only one out of 200 Americans own such a score. If your credit score is in the low 700s then your aim should be to take it higher. For a reasonably good interest rate, you must aspire for a credit score of at least 660.

Implement these steps to raise your credit score before you start house hunting.

  1. Pay your bills on time. It sounds like a basic common-sense thing to do, but many monthly budgets go haywire and credit scores get dinged because this elementary financial due diligence is not adhered to.
  2. Control credit card debt. Try to get out of the habit of living on credit. Live within your means. Curtail expenses where you can, and use the savings to pay off credit card debt. This will bring down the debt to credit ratio. Try to bring down the ratio to 30%. A quicker way to boost this ratio is to ask for a raise in the credit line extended to you. If you can get that done, then great. Usually, a telephone call or an online form does the trick.
  3. Check your credit reports for mistakes. Every 12 months, you can avail a free copy of your credit report from Equifax, TransUnion, and Experian. Nearly 25% of Americans have reported errors on these reports. Getting these errors cleared will raise your credit score. Your loan officer can help you with the process. These things take time, so begin early.
  4. If your lapses in payment were exceptions and you’re not a serial payment delayer then you must make an effort to get black marks off your report. Approach your bank to issue you a new credit card statement. If you’re an old customer the bank might take a lenient view of the situation and send letters to the credit bureaus. You must be prepared to do the running around to gather the necessary documents and ensure that the relevant parties are updated with the latest information.
  5. A credit counseling agency can be of help, but only if you’re in a really bad situation like having to juggle multiple debts with no clue about which one to tackle first. If you’ve got one or two credit card debts to take care of, you can do so on your own without external help.

Once you’ve taken these steps then compare mortgage lenders. You’ll find some that will work with you with the credit score you have. FHA home loans have a low credit score requirement of 500. Check if you qualify for an FHA bad credit home loan. A score of 580 can get you an FHA home loan with 3.5% down payment. For FHA loans, your debt to income ratio must be less than 43%.

 


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