While home buying can be an emotional experience, getting a mortgage is a pure business. When a Mortgage lender tells you that your credit rating is not high enough to qualify for a mortgage, it is not personal. All lenders have certain credit criteria that must be met; it is their way of protecting themselves from loss.
So what if you want to buy a home but yours credit-worthiness is not perfect? As long as your credit isn’t even low, you can get creative.
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What is a low score anyway?
One fact that makes credit scores a little confusing is that there are so many of them. These numbers are generated by credit bureaus and financial institutions. The two most used are FICO® score and VantageScore. So for this article we will use the scores generated by FICO.
The FICO credit scores range from 300 to 850. The better your credit history, the higher your score. Lenders look positively on high credit because they show that you have done an excellent job in credit management in the past. Borrowers with high scores are offered the lowest interest rates and it is easiest to get loans when they need it.
However, that doesn’t mean a lower score will leave you on the sidelines. You still have options. The first step is to find out where your credit score lands.
It is important to get a free copy of your credit report from the company three major credit bureaus at least once a year to check for errors. But these reports usually don’t include your creditworthiness.
You may be able to find out your creditworthiness from your bank, credit union, or credit card company. You can also pay to have your credit score checked through a credit rating service or look it up through a free credit rating site.
Once you find that value, this table will give you a rough idea of how lenders see it:
An important clue: They are much more than your creditworthiness. When your finances are in trouble, you can recover from a low credit score. It doesn’t seal your financial fate. Many people have gone from having a low credit score to having a very high credit score. Regardless of whether your financial situation is due to unexpected circumstances or other situations, there is an opportunity for you to increase your score.
Five Ways To Buy A Home With A Lower Credit Score
If you have a less than perfect score and you are looking for a home, here are some steps you can take.
1. Ownership financing
If your credit rating is extremely low, it is unlikely that a lender will approve you for a mortgage loan unless you have a substantial down payment and low total debt. Until you had the chance increase your score, your only option may be a self-funded loan. The first step is to find a seller who is willing to fund the mortgage – at least for a few years. How to find self-financed real estate:
- Work with a real estate agent. Only the home seller pays brokerage fees, so working with a broker does not cost you anything. Explain your situation to a good realtor and have them look for available self-financing homes.
- Look for homes for sale by the owner. These sellers may be open to short-term funding.
- Let family and friends know that you are looking for a self-financed home. The more people know, the more likely someone will offer a lead.
When you’ve found self-financed property that you can afford, here’s what you can expect:
- You agree on a sale price, down payment, interest rate, and how long the seller will bear the mortgage (usually three to five years).
- You pay the deposit and sign a promissory note.
- The owner will keep the title until you refinance the home a few years later and the title is handed over to your new mortgage lender.
Self-financed housing is not always easy to find, especially when the housing market is hot. However, if your creditworthiness is poor, you will have time to consider moving to a self-financed property Increase Your Credit Score enough to refinance the mortgage with a traditional lender in the future.
2. Conventional loan
A score of 620 can be enough to: a. to land conventional creditespecially if you have a high income or offer a down payment of 10% or more. If you are approved for a conventional mortgage with fair credit, you may end up with a higher interest rate than the current one.
3. VA Loans
If you are a veteran or a current member of the armed forces, VA loan were specially made for you. A VA loan backed by the Department of Veterans Affairs not only offers 0% lower mortgages, but the score required to qualify varies by lender. For example, Rocket mortgage approves VA loans with a score of only 580.
4. FHA loans
FHA home loans are backed by the Federal Housing Administration (FHA) and typically require a credit score of around 580. However, if you can pay a 10% down payment, you can get approved with a rating as low as 500.
5. USDA Loans
USDA loan also have government support. In this case, it comes from the U.S. Department of Agriculture (USDA). That means if you stop paying, the USDA will step in and take over the debt. The house (and you) would still face each other foreclosurebut the government promises to make the lender whole. If you’re interested in buying a home in a qualifying rural area with no down payment, a USDA loan makes it possible with a score in the 640 range.
Finally, remember that there is nothing wrong with waiting until your credit score gets better to buy a home. Not only do you qualify for a lower interest rate, but you also have time to get around save for a larger deposit.