The different needs and circumstances of borrowers call for varied types of home loans. For…
FICO Scores start at 300, so a 300 credit score is definitely the worst score you can get.
According to Experian, only 1% of American borrowers actually have a FICO score lower than 500, but this doesn’t mean that only 1% of people have bad credit. In fact, the threshold for what a bad credit score is is a lot higher than you might expect.
In the current market, having poor credit can feel like the worst-case scenario. Housing prices are going up, and buyers are just getting more and more competitive. So you feel like asking, “What are my chances with the credit score I have?”
We feel you, but it really is a situation you can still turn around. Remember, many people have been where you are, and there are systems in place to ensure that there will always be options for everyone.
In this article, we’re going to define how bad a bad credit score really is, as well as show you the number of options you still have at this point. Furthermore, if your needs demand it, we will share with you ten tips to improve your circumstances. We really hope it helps!
What is a bad credit score?
It doesn’t actually take a lot to fall into bad credit. If you miss a few of your payment deadlines by at least 30 days, this can really shave a lot of points off your score. What takes a lot more work is to keep yourself in the good credit score range because this means that while you do borrow money, you don’t borrow more than how much you earn.
If you really want to know what bad credit looks like, there is a technical range for it, as you will see below.
According to FICO
Here are the credit score ranges according to the Fair Isaac Corporation (FICO):
- 300 to 579 is Poor
- 580 to 669 is Fair
- 670 to 739 is Good
- 740 to 799 is Very Good
- 800 to 850 is Exceptional
The distance between 670 and 300 may be way longer than the distance between 670 and 850, but it is only at this level that you actually get a good credit score.
Can you get a mortgage even with bad credit?
At this time, you’re probably worrying about the possibility that you’ll get rejected for a mortgage. The truth is, different lenders have different requirements.
But we have excellent news for you. Despite what you might think, mortgage lenders, do want to let you borrow money. After all, it’s a business, and if they reject you, they also lose an opportunity.
Even if you have a credit score as low as 500, you can even qualify for at least two government-insured mortgages.
What are home loans with bad credit scores there?
The fact of the matter is that the most common mortgage loans only require minimum credit scores below the good FICO Score range. Unfortunately, that’s a credit score below 670.
A lot of these are government-backed loans that are also really there to provide ample opportunities to those in this type of situation. There are also traditional loans offered in the private sector that are primarily aimed at those with credit scores a little closer to the good range.
To begin, if you are getting a mortgage that the government does not insure, what you’re getting is a traditional mortgage or what’s called a conventional loan. Although the government does not guarantee this, it is still regulated by Fannie Mae and Freddie Mac, institutions that decide the loan limits that are quoted annually.
A minimum credit score of 620 is required if you want to qualify for a conventional loan. The higher your credit score, the better your chances, and the higher loan amount you can get.
A great benefit you can get with a conventional mortgage is putting as little as a 3% down payment. However, if you make as low a deposit like this, you’ll have to pay for private mortgage insurance (PMI), which assures lenders on the off chance that you default on your loan. If you want to skip PMI, you can always opt to pay as much as 20% down, but it ultimately falls off once you gain 22% home equity.
The mortgage option that most people would probably be familiar with is the FHA loan. Needless to say, this is insured by the Federal Housing Administration, and you need to have a minimum of a 500 credit score to apply.
There are many disadvantages to getting a home loan with bad credit, and one of them is you need to deposit at least 10% of your home’s purchase price. Therefore, it’s a lot more preferable if you can get your score up to the fair credit score range (at least 580) because, at this level, you’ll be allowed to make a low 3.5% down payment.
Another thing that might convince you to stay away from this option is mortgage insurance, which just never goes away even if you’ve already paid up to 90% of your mortgage. If you remember, with conventional, they already stop charging you when you’ve earned 22% home equity. However, for FHA, this is just the way it is, and for this reason, many borrowers eventually opt to refinance their FHA loans.
If you want to move way out of the cities, on the other hand, you can get a rural housing loan or what’s called a USDA loan because the U.S. Department of Agriculture guarantees it.
Just FYI, though, the USDA has a specific definition of what a rural area is, so if you want to confirm your location’s eligibility, you can check out this page.
The USDA loan is another mortgage with bad credit because there really is no defined minimum credit score to apply. It is also targeted to particular income brackets, so if you earn more than the state average, it might put you at a disadvantage.
With this type of loan, you can also buy a house without putting any money down, which is fantastic as far as bad credit home loans go. Usually, less ideal mortgages ask for as high as a 30% down payment if you have a really low credit score.
The last loan program we’ll discuss is the VA loan. This is particularly meant for our service members for the hard work and sacrifices for our country. Because this loan is already so exclusive, the minimum credit score requirements are a little more relaxed, although you would indeed be in a better position with a credit score of 640.
Some of the great features the Department of Veterans Affairs loans offer to our service members are the following: zero down payment, the most competitive interest rates in the market, and no mortgage insurance.
How do I get the best loan?
The lower your credit score, the fewer your options can become. But, even if there are still choices you can lean on despite a lower credit score, we still encourage you to work on improving your credit as a way of investing in your future.
The best motivation we can give you at this point is to think of the savings you can make if you don’t have to pay for any mortgage insurance. Now, if you get a rural housing loan, you might not have to worry about this, but you’ll have minimal places to look for the house you want to buy. However, if you get an FHA loan, the mortgage insurance stays for the life of the loan and can mean hundreds to even thousands of dollars. So the best way to go would be your Fannie Mae or Freddie Mac loan, especially if you can’t qualify for a VA loan.
Here are ten things you should do, not just to qualify for a loan, but to qualify for the best loan for your dream house:
- Know your debt-to-income ratio. Aside from your credit score, lenders use this big criterion to determine if they should let you borrow money. Your debt-to-income ratio or DTI ratio reflects how much of your monthly earnings go towards debt. Each lender will have its own preferred DTI ratio, but to be safe, you’ll want to keep yours under 36 percent.
- Work on increasing your income so you can stay on top of your debts. This will help you improve your DTI ratio and your credit score by lessening your existing debt.
- Check your credit report. We shouldn’t assume that our credit history is always 100% accurate. Find out if there are any errors on your own and dispute them as fast as you can.
- Expunge negative lines in your credit report. We can’t promise that this will work all the time, but if you ask very nicely, you might be able to convince your bank to remove reports of late payments or similar in your credit report.
- Get a mortgage pre-approval. Practice applying for a mortgage by getting pre-approved. It will let you know how much your budget really is before you actually start shopping for a home.
- Keep credit utilization below 30 percent. If you have many credit cards, do your best to use only up to 29% of your credit limits.
- If you don’t have a credit card, it would be better if you applied for one. The more credit cards you have, the larger your credit line will make it easier to work on your credit utilization.
- Aim for a larger down payment. Don’t settle with a 3% or 10% down payment if you can make it at all possible. Instead, save for as much as 20% of your dream home’s purchase price.
- Read mortgage lender reviews. In the information age, it’s so much easier to get feedback from other consumers. Remember that mortgage lending is another form of service, and even if you are borrowing money, you are also a customer. Read up on other people’s experiences with the mortgage lender before you apply.
- Finally, shop around for the best mortgage. According to the Consumer Financial Protection Bureau, a surprisingly big percentage of people don’t bother to compare mortgage offers. Instead, they sign with the first lender they speak to. If you don’t bother to see what other options are out there, you might miss out on many savings.