If you've been finding it hard to choose a mortgage, you're not alone. Home loans…
Even when you think you’re doing great financially, you don’t really know when life will take a 180-degree turn to put you down in the dumps. With just a few missed bills, your credit score can really take a deep nosedive. Bad credit can happen to anyone, especially after an emergency, and everyone also has their own unique way of dealing with such a situation.
With many people out there who need a mortgage, especially during a pandemic, it can really make you wonder if home lending for bad credit is still possible.
Today, let’s find out the best type of mortgage you can avail of, even with bad credit, as they call it. We will also share some tips on how people can boost their credit scores, so they don’t just have to settle for loans for bad credit. At this time of global crises, we must help each other by sharing information other people need to know.
How low are low credit scores?
In case you haven’t read about this before, it’s actually impossible for anyone to get a credit score of zero.
Credit scores are based on a person’s credit history, so you either have an available history or don’t simply because you haven’t started. Once you have begun transacting with credit institutions, that’s only when someone can start computing for your credit score and only if a financial background check will be requested. According to Experian, 99% of consumers have a score of at least 470. The lowest score you can get is 300, and there are very few people who can lay claim on this bad credit score.
The most common credit score referred to by bureaus is from the Fair Isaac Corporation (FICO). Like any credit score, a FICO score is just a measure of a person’s risk that helps lenders consider if someone is qualified to borrow money.
For FICO, 5 criteria compose the credit score they compute:
- 35% for payment history – how often you pay your bills on time
- 30% for amounts owed – your borrowing spread across all your accounts
- 15% for the length of credit history – how long you’ve built history with financial institutions
- 10% for credit mix – the variety of loans you have been able to avail
- 10% for new credit – how many new accounts you have opened recently
For FICO, no one ever starts with a credit score of zero. Most people begin with a score of 300 and can climb all the way up to 850, the considered maximum highest score you can get. Lower credit scores are those below 580.
In 2020, despite the COVID-19 pandemic, the average FICO score reached an all-time high of 710, which is well within the good range defined by the company (670-739). With this kind of credit score, you’d be able to qualify for a loan no matter who the lender is.
But what if your credit score falls below this range?
Can I get a home loan with a 500 credit score?
A mortgage is a home loan you can apply for if you don’t have enough savings to afford home equity. However, some people buy a house using a mortgage even if they have cash for upfront payment; the vast majority of borrowers do so because of a lack of liquidity.
To understand what kind of mortgage is good even for a low credit score, first, we need to talk about the minimum credit score requirements of the popular types of mortgages. When it comes to home loans, no one-size-fits-all approach. Different loans have varying requirements as well as interest rates applied and loan terms.
Home Loans with Good Credit
Let’s start with the type of mortgage that the federal government does not secure.
Conventional loans are those that private mortgage lenders back. This kind of loan can usually allow you the most amount of money to borrow. In 2021, the maximum (conforming) loan limit for a single-family property rose to $548,250 from $510,400 in 2020. However, regardless of the need for a higher loan amount, many people still avoid applying for this type of mortgage due to higher interest, the obligatory private mortgage insurance, and the high minimum credit score required at 620.
The first government-backed loan we’ll discuss is from the U.S. Department of Agriculture. Although the ideal credit score to get a home loan through the USDA is set at 640, they won’t really discriminate due to bad credit if you can prove the circumstances that caused your low credit score. This type of home loan is also quite popular because it does not ask for a down payment, as long as the property you are purchasing is located in a rural area.
To qualify for a mortgage through the U.S. Department of Veterans Affairs, you have to either be a veteran or active duty service member. Secondly, you must also have a minimum credit score of 580. Once you have passed through those hoops, you can then enjoy the most competitive interest rates on the market as well as zero down payment via this loan program.
Home Loan with Bad Credit
Technically, you would still be able to borrow money for your house with bad credit through a USDA loan, but you will have to make sure that your house is located in a rural area.
Regardless of location, however, you can still get a mortgage even with the considered poor credit score of 500. FHA loans are secured by the Federal Housing Administration and are specifically written to offer opportunities for first-time home buyers. Even if you are not a first-time homebuyer, you can still qualify for an FHA loan.
With a credit score of at least 580, you can be allowed to borrow up to 96.5% of your home’s purchase price. Below this number, however, but above 500, you will just be asked to make a larger down payment of 10 percent. For this reason, people outside the military with credit scores below 600 consider this as the best out of the loan options out there.
Where can I borrow money for my house with bad credit?
Since we have identified FHA loans as the best recourse for mortgages with bad credit, here are just some of the companies where you can try applying for a mortgage as of 2021.
- Amerisave Mortgage
- Freedom Mortgage
- Mr. Cooper
- Quicken Loans
Improving Your Credit Score
Based on the information we have shared today, it easily becomes clear that credit scores are essential for securing your home purchase. Even if you live on moderate-income or swipe all your purchases with a credit card, you do live in a bigger world of wider opportunities when you have a high enough credit score.
But don’t despair! It’s never too late to improve your credit. In fact, sometimes, you need to apply a few tweaks to your monthly habits. You never know; one day, you might even qualify for a conventional loan that will allow you to move into the house of your dreams!
Here are some tips you should make the effort of trying so you can boost your credit score in no time.
Always pay on time.
The best hack to ensure this is to pay right away once you have received your bill in the mail. However, if your liquidity does not permit this, make sure that you are never late, especially right before applying for various loans.
Read your own credit report.
Did you know that you can request a free credit report? Furthermore, credit reports can contain errors. In fact, in 2020, there was a 107% increase in erroneous credit reporting. Even the slightest mistake on this documentation can heavily impact how you live your life, so don’t miss your free opportunity to find out if it is less than 100% correct!
Keep your credit utilization low.
The easiest way to keep track of this is by adding up your amounts owed through credit cards and compare this against the total credit limits allowed by the issuing banks. As much as possible, you must keep your percentage of usage at 30% or below. This can greatly help your credit score because the amounts owed composes 30% of your rating. Credit utilization below 30% also tells mortgage lenders that your income is not spread too thinly across many debts.
Don’t open too many accounts all at once.
Try to keep your applications spread apart. Remember, new credit affects 10% of your credit score, and opening many new accounts in a short period can also make lenders think that it is too risky to let you borrow their money.
Keep your credit cards even if you don’t use them.
They’re not just good for emergencies! Keeping your old accounts gives you longer credit history, and the longer your relationship with banking institutions, the more attractive you become to lenders. This helps a combined 25% of your credit score: 15% for your credit history and 10% for your credit mix.