The global pandemic has meant that getting hold of credit has become more challenging than ever. It is estimated that 21% of US consumers have been turned down in the last year alone. But do you know how to get accepted even with low credit?
If you have saved your deposit but are still worried about your application, we can help. Below is our guide to buying a house with bad credit.
What Do I Need to Get a Mortgage?
Each lender will have a different set of criteria that they check you against during your mortgage application. However, there are some universals which all lenders will check. Luckily, it is not just based on your credit score.
The downpayment you require depends upon the lender. Some may even offer 0% downpayments, though 5% is more likely. Keep in mind that the higher your downpayment, the less risky it is for the lender, which could offset a bad credit score.
Another consideration is the amount of debt you have. Divide the combined sum of your monthly debt payments by your monthly income to get a percentage amount. This is known as your debt to income ratio.
The percentage you get will be your debt to income ratio. Ideally, you need one of 35% or less when applying for a mortgage loan. You can also increase your chance of being accepted by having around six months’ worth of mortgage payments in the bank.
What Should My Credit Score Be?
As mentioned above, factors other than credit score influence the decision to lend you the money for your mortgage. Therefore no specific credit rating will guarantee a yes or no answer. However, some ratings will have a much more positive impact on the outcome.
700 and Above
This will be considered an excellent credit score. If your other factors are average, this should still see you get the loan you need. Having a score of this rating will also ensure you get the best interest rates.
620 to 699
At the lower end of this score, you could face rejection if your other factors are not favorable. On the higher end, you can expect to be accepted for most loans should you have everything else in place.
500 to 619
This is not a great credit score, considered harmful to fair. Unless the other factors are highly positive, you can probably expect to be turned down. There are other alternatives, such as FHA loans, that you may be accepted for.
Below 500, you are highly unlikely to get loans backed by the government. This also applies to people that have no credit score. In this instance, you should start building or repairing your credit score as mentioned above before a reapplication.
Start Paying Down Existing Debts
The amount you owe on existing debts can make up around 30% of your credit score. By paying down existing debts, you can significantly improve your credit rating. This key element is known as credit utilization.
Imagine you have a credit card that allows you $1000. If you are using $900, you are using 90% of your credit allowance. The ideal amount is between 0% to 30%.
Work on getting this down as far as you can to repair credit. It may even be worth using some of the deposits you have saved to push your credit score down. Once done, it will only take a few months to improve the score.
Monitor Your Credit
Knowing your credit score and report can help you make adjustments to improve it. You can do this by opening an account with a credit monitoring site. Some may even offer the service for free.
Once you have done this, check for any errors. You may find people say you owe money when you have already paid. Check no fraudulent accounts have opened in your name.
When you have addressed any errors, look and see how you can improve. Assess your credit spending and see how making payments on time can help you.
Know the Types of Loans
A conventional loan is one from a bank. They are the most common and are not backed by the government. However, they are not your only option for a mortgage loan.
Should you get turned down due to bad credit, think about an FHA loan. These are specific government-issued loans for people with low credit scores. You will need a minimum credit score of 580 with a 3.5% down payment, increasing as your score lowers.
If you are a military service member, you may meet the criteria for a VA loan. There is no minimum credit score, and it can even apply to surviving spouses of deceased service members.
Finally, a USDA loan is for low-income applicants, specifically those living in rural areas. They also have no minimum credit rating.
Consider a Co-Signer
You can also use other people with better credit scores to back you up, or they can use your credit score to better theirs. A co-signer is one way to do this. They will agree to pay the mortgage payments should you default on them.
If you have a partner with bad credit who is applying with you, one tactic is to add them to your credit card accounts. As an authorized user, they will benefit from your good credit, considering you keep it on track yourself.
Buying a House With Bad Credit
Now you know all about buying a house with bad credit, formulate a plan. Work on improving your credit rating and look into alternate methods of lending. Remember to track your credit rating as you make improvements.
If you need assistance with your credit, then Joe Chavarria should be your first stop. By leaning into ten years of experience, we will provide you with workable credit solutions.
Contact us here to discuss your needs and start the process of getting approved for a loan today.