Tips to Buying a Home with Less Than Perfect Credit

Let’s talk about buying a home with low credit. If you’re tired of paying rent every month or you’re ready to settle down and need more space to do so, buying a home would seem to be the next step. If your credit is less than perfect, is this still an option? Depending on your score, it may be. However, there are a few things to keep in mind.

A good credit score can vary. According to Experian, anything under 670 is less than desirable. You can still get a loan but there may be some things to keep in mind when looking to buy a home with a score under 670.

Know Your Credit Score

First, know what your credit score really is. Typically, you have three credit scores, Equifax, Experian, and TransUnion, the major credit reporting agencies. Find out all three. You can get your FICO score from some credit card companies or banks, but you are also able to request a free copy of your credit report once a year with no penalty. Along with knowing your credit score, be prepared to check and dispute errors. If your credit report has errors, that can lower your score and you should dispute them with the creditor.

Know You May Pay Higher Interest

A lower credit score is not the end of the world. You can still get approved for a loan but there may be some stipulations like a higher interest rate. A higher interest rate means a higher monthly payment but there’s a chance you will increase your score and be able to refinance for a lower interest rate in the future.

Consider Other Loan Types

An FHA loan is insured by the Federal Housing Administration and comes with a lower credit requirement. You can qualify for an FHA-insured mortgage with a down payment requirement of just 3.5 percent of your home’s final purchase price and a FICO credit score of at least 580.

FHA loans have some catches. On traditional mortgage loans, you can cancel your private mortgage insurance after building up enough equity. With FHA loans, you can’t eliminate private mortgage insurance throughout the entire life of your loan which can make your monthly payment a bit more.

Put Down a Larger Down Payment

If you’re willing to put down a larger down payment, you might have a better chance of being approved for your home loan. By putting down 20 percent or more, you’re proving that you are willing to take the risk of the mortgage and because you’ve put so much of your own money into the home loan, you will more than likely not default on your loan.

Rebuild Your Credit

If your credit is lower than 580 or you aren’t willing to consider an FHA loan, rebuilding your credit score may be the best option. Pay your bills on time every month to rebuild payment history and pay down as much of your debt as possible. Trying to keep your credit usage under 30 percent provides the best score. The process is slow but may be your only option to getting approved for a home loan.

If you’re unsure where to start, let us help you. Contact one of our Loan Officer’s to see what steps you should take toward your future home ownership.