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Can you get a home loan if you have a poor credit score? – Learn here!

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The mortgage industry plays a big part in keeping the national economy healthy. In addition, because mortgages make homeownership more accessible for the average person, more people can achieve their American Dream.

Whenever someone purchases a house, this has a domino effect on a lot of other industries. Homeowners will need to furnish their brand new home, which will entail many other purchases. They might want to do some renovation, which will need the help of carpenters and skilled workers. This increase in the local population also means more buying power to boost the local economy. In all, the real estate market must remain strong, which is kept by ensuring that more people can avail mortgages.

It is never a good day to find out that you have a poor FICO Score. But what exactly is a poor score, and does this mean you can’t purchase a home through a mortgage?

In this article, we will discuss how you can buy a house through a home loan. You will also find out if you truly have a poor FICO Score and whether it is the best time to apply for a mortgage.

Credit Scores

Our FICO scores have a huge impact when we get credit cards, car loans, or home loans, but they’re just a representation of our behavior as a borrower. For example, higher credit may imply that you consistently pay your bills on time or make more money than you owe. This is, however, where a credit score’s definition ends. It doesn’t say anything about your character or your circumstances. For this reason, lenders often have to look at supporting documentation to see your story in a better light. Credit scores offer just a brief peek at your financial history and background.

What is bad credit?

You will often hear the word poor used to refer to bad credit and vice versa. However, not all bad credit is poor, but all poor FICO Scores are bad credit.

FICO Scores range from 300 to 850. No one can get a FICO Score of zero, although you might request a credit report and find out that there is no credit score under your name. When that happens, it means that you currently don’t have any record of debts because often, you need to have at least two active credit accounts to generate a rating.

Between 300 and 850, some ranges categorize what kind of credit score you have. Based on the Fair Isaac Corporation’s scoring system:

  • 300 to 579 is Poor;
  • 580 to 669 is Fair;
  • 670 to 739 is Good;
  • 740 to 799 is Very Good;
  • and 800 to 850 is Exceptional.

When we say that you have a bad credit score, any credit score falls below 670, but only 300 to 579 is considered Poor.

How do you get a low credit score?

It is harder to get a high credit score than a low credit score. But, sometimes, all it takes is one wrong move on your part to lose a lot of points in your FICO rating.

Bad credit goes so much more beyond missing your bills. Some people have lower credit scores despite never having once filed for bankruptcy or experiencing a foreclosure.

Here are some reasons why you might have a bad credit score:

  • Applying for several loans all at once. Every time you apply, this entails a hard pull on your credit, taking points off your score.
  • Frequently maxing out your credit cards even if you can pay on time. Part of your FICO Score considers how much debt you owe across all your credit lines.
  • Having recently closed an old credit account. The more loyal you are to a lender or a card issuer, the stronger your credit score. It implies that there is a long history of trust in a financial relationship.
  • You have yet to gain more experience in borrowing and paying back the money. Maybe you only have credit cards, and you’ve never applied for any other type of loan.

It is also worth noting that the more recent your last late payment is, the more impact it has on your credit score. A late payment is defined as a delayed payment of at least thirty calendar days. So even if you’ve made several late payments before, if these happened way back in the past, they won’t have as much effect on your credit, as long as you’ve made more on-time payments since then.

Why is it hard to get approved for a mortgage on a low credit score?

Most people only have to buy a house once in their lives, so it is likelier that you will only have one mortgage.

According to Statista, the average price of a home in the U.S. in 2021 is 408,800 dollars. It’s a significant increase compared to 2019’s 383,900 dollars.

Today, there can be very tight competition in the real estate market due to the low supply of houses in the wake of the COVID-19 pandemic. More often than not, you will have to prepare more money to pay over the asking price to win over a house seller. So it is truer this year than in the previous years that you will need to have a higher credit score to buy a house. The better your credit, the higher the loan amount awarded to you and the cheaper the mortgage costs.

Whatever your credit score, you can still get a home loan. However, your options can get a lot limited. If you keep getting rejected for a home loan, this can imply that you are not applying for the right kind of mortgage.

Each mortgage has its own minimum credit score requirements. Aside from the starting credit score that the government advises for federally-backed loans, lenders also include further requirements of their own.

Credit scores are also only enough to get you through the first hurdle. To qualify for a mortgage, you also need a debt-to-income ratio that’s preferably below 40 percent, at least two years in current employment, and money set aside for making a down payment.

As we’ve mentioned in the previous section, every time you apply for a loan, this deducts points from your credit score. So with this in mind, it’s better to know what you should use for before you go ahead, as it will give you a better chance of getting approved.

Let’s find out which mortgages are still available for you, even with a lower credit score.

Poor Credit Score Home Loans

VA Loan

Minimum credit score required: None.

Overview: Can buy any house in the U.S. Primary residence of at least one year is required.

The Department of Veterans Affairs makes an effort to help our service members and veterans get access to homeownership via the VA loan program.

Since this is more of a job perk for veterans than a way to boost the real estate market, the VA does not encourage mortgage lenders to set a minimum credit score to approve applications. Ideally, borrowers with low credit should still apply for VA loans, significantly since their credit history can be primarily affected by their services rendered. In addition, there are further benefits for service members who acquire a disability from active duty in line with this.

What sweetens this deal for our veterans is that they don’t have to prepare a down payment to close a mortgage. They can make as low as a 3% down payment or none at all. In addition, the VA backs 25% of the home loan if you stop paying back the mortgage. So on the lender’s end, you already have 25% home equity, and they also won’t need to charge you for mortgage insurance.

So if you don’t have any savings to make a down payment, you only have to prepare for the mortgage’s closing costs as well as a meager VA funding fee that will depend on how many times you’ve availed a VA loan.

Note that the surviving spouses of eligible veterans can also take up this offer from the VA as long as they have not remarried.

USDA Loan

Minimum credit score required: None.

Overview: Only for rural real estate. A primary residence of at least one year is required.

The U.S. Department of Agriculture also guarantees a mortgage, often referred to as a rural home loan. This is due to its most crucial requirement: your home’s location must fall under what the USDA considers a rural area.

While this crosses out many real estate possibilities for your home purchase, the USDA is indeed more lenient when it comes to credit score requirements. The main number to remember is 640.

With a credit score of at least 640, you can experience a smoother USDA loan application. However, with a much lower credit score, they will have to dig deeper into your credit history to prove that you still have a good chance of paying back your mortgage in full. This is to satisfy the Dodd-Frank Wall Street Reform and Consumer Protection Act requirements for ability-to-repay.

There is a misconception that you have to use your USDA loan for a farm or agricultural purpose. However, the USDA loan is purely a residential loan, and you are not allowed to use the home for any other reason, most of all commercial. This limitation aims to discourage people from abusing the loan program due to its benefits.

Note that although there is no minimum credit score you should aim for, there is a strict household income limit that may disqualify many borrowers. This is because the application will include the income declaration of all the other people living in the home. The limit will depend on the average median income of the state where you will be purchasing a house.

If you can check all of the boxes demanded by a USDA loan, however, you stand to gain the chance of owning a home without making a down payment.

FHA Loan

Minimum credit score required: 500.

Overview: Can buy any house in the U.S. Primary residence of at least one year is required.

If you cannot qualify for any other mortgage with bad credit, there is still the FHA loan option that you can try out.

Backed by the Federal Housing Administration, this loan program is an excellent means for bad credit borrowers to get closer to homeownership. A 500 credit score falls in the Poor range of FICO Scores, but you can qualify for a loan even with this low credit score.

If you want a cheaper mortgage, you need to pay at least 10% as a down payment for the FHA loan. We recommend this minimum down payment amount due to the monthly mortgage insurance.

If you have Fair credit, which starts at 580, you have the option of paying just 3.5 percent. Note that if you do so, however, the monthly mortgage insurance will be charged to you for the whole life of the loan. On the other hand, if you pay a 10% minimum, you only pay for monthly mortgage insurance for eleven years. So regardless of how much of a down payment you make, you pay an unavoidable upfront mortgage insurance fee at closing.

The FHA aims to provide this option for borrowers who can’t qualify for a conventional loan. They also recognize that many low credit borrowers do not have enough funds to make a down payment. So they allow applicants to get help from down payment assistance programs. Gifted cash from family and friends can also be used to create a down payment.

Conclusion

A home is essential for the security of a family, but sometimes, we can be privileged enough to delay a house purchase.

It is easy to answer the question, “Can I get a home with bad credit?”

On the other hand, it is trickier to decide whether you should consider buying a house in this situation. Low credit scores mean more expensive mortgages. It can also require you to make a larger down payment, as in an FHA loan. Loans for bad credit are also not offered by a lot of lenders. So you might have to shop around and talk to more people before you hand in your application.

Before applying for a mortgage, ask yourself if it is the best time for you to buy a house. Then, decide if you want to choose between improving your credit first before closing on a home loan. The difference in how much it will cost you can be in the hundreds to thousands of dollars depending on how much you can improve your credit score.

Until such time that the housing market shows an increase in supply, home prices are just going to keep rising. So while mortgage rates are currently low, it may be better to get a home loan once the real estate market calms down. If you do this, you can avoid overpaying for a house.

You never know what can happen tomorrow!

 

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