Contrary to popular belief, people with poor credit ratings can still apply for one Home loan.
You can find lenders with mortgage programs specifically designed for borrowers with low credit history or a record of credit defaults. In addition, you can increase your credit rating and possibly refinance an existing loan to get a better interest rate.
Here are the top things to know about your FICO credit score and seven ways to increase your chances of getting mortgage financing – even if your credit is anything but great.
Continue reading: 7 warning signs that could ruin your mortgage application
What is considered bad credit?
Quicken Loans requires a “fair” score of 620 or higher, while United Wholesale Mortgage requires you to have a “fair” score of at least 640 to qualify for conventional mortgages.
But what exactly is a “fair” credit score?
The average score was 711 and the bare minimum to be fair was 580, according to ratings firm Experian.
Experian also reported that 46% of Americans have very good to exceptional ratings (740–850) while 16% have very poor ratings (300–579). Lenders tend to be wary of the latter as they are more likely to fail.
How Does Bad Credit Affect Your Mortgage Application?
There is no FICO minimum that will completely exclude you from taking out a mortgage, but you will likely get turned down if you are in your mid-600s or below.
Even if you qualify, you will have to pay more over the life of the loan because of the high interest rates and closing costs.
To demonstrate, the annual percentage (APR) for those with exceptional credit scores of 760 and above in 2020 was 2.369%. Using myFICO’s loan calculator, your total interest payable on an average 30-year loan of $ 248,640 would be around $ 99,000.
Meanwhile, the APR for borrowers below 640 was 3.96%. You’d have to pay $ 177,000, or 79% more interest.
But don’t lose hope. Here are ways you can increase your chances of qualifying for a mortgage and getting good business despite your bad credit.
1. Look for bad credit Home loan in the area where you live
Government-supported loans are less risky for lenders and have less stringent requirements for your creditworthiness, debt to income ratio (DTI), and down payment.
For example, you can sign up for a FHA loans if you have not bought a house in the past three years, or First time home buyers. With the assistance of the Federal Housing Administration, you can likely qualify with a 500-579 score if you can pay a 10% down payment.
You should also a become Loan insured by the Department of Veteran Affairs. This program allows you to qualify with a credit score of around 580 with no down payment if you are a veteran or actively serving in the Army.
Continue reading: The 7 Most Popular Types of Mortgage Loans For Home Buyers
2. Save for a larger deposit
It is possible to have both a low credit score and significant savings. Lenders will likely approve a borrower with poor creditworthiness for a down payment of 10% to 20% of the property’s value.
In addition, paying 20% less on a conventional mortgage can save you more money in the long run. This is the minimum requirement to avoid paying insurance on top of your monthly mortgage payments.
There is no one single rule of what the down payment should be, but it can vary based on your location and the type of mortgage to which you are eligible.
3. Consider adding a letter of explanation for past financial difficulties
It is a red flag for underwriters Seeing negative points on your credit report, but writing a good explanatory letter can help your case.
“You may need to provide a letter of explanation for any negative items on your credit report, including missed payments, defaulted loans, or redemptions,” says Quicken Loans. “The letter should include an explanation of the negative event, the date of the event, the name of the creditor and your bank account number.”
You should let the lender know that you are good at managing your finances and that wrinkles in your credit history are due to difficult and reasonable situations.
Continue reading: Why black home ownership rates are 35% lower than whites
4. Find a guarantor
Lenders can still allow low credit applicants if they have guarantors to cover the mortgage in the event of default.
A guarantor is usually an immediate family member with a better financial position. They have to prove their income and good creditworthiness as well as sign a legally binding agreement.
The guarantor’s name only appears on the mortgage and not on the title, so he has no rights to the property.
In addition, the lender will usually exhaust all collection options from the main borrower before the surety becomes liable for repayments.
5. Accept help from your family.
If you have poor credit, you have a better chance of qualifying if you can make a larger down payment. If it is difficult to save, you can use money that has been “given” by a family member.
Note, however, that this cannot be a loan and you should not have any obligation to pay the money.
In addition, the gift must be properly documented and communicated to your lender. Otherwise, the underwriter may mark the money as a new loan or a deposit from an unacceptable source.
6. Doing business with a mortgage broker
Mortgage broker act as an intermediary between potential borrowers and credit institutions. Not only do they save effort and time, but they can also help you find the best mortgage terms that suit your situation.
Choosing this path can be useful for applicants who are dealing with poor creditworthiness, are self-employed or have an income outside of the W2. Brokers take care of the loan purchase and provide you with a lender who will do justice to your individual financial situation.
A potential disadvantage to using a mortgage broker is the cost. Brokers typically receive a commission of 1% to 2% of the total amount, which can be expensive, especially on large loans.
Continue reading: 7 questions from first-time buyers that every realtor needs to answer
7. Repair your creditworthiness and refinance yourself on better terms
You can refinance a bad credit mortgage so you don’t get stuck on an inconvenient rate for the life of the loan. To get a better deal, you need to proactively rebuild your creditworthiness in a number of ways.
First you need to settle overdue accounts and stop missing payments in the future. Finally, your credit report may show late payments for up to seven years from the date of default.
Keeping all accounts up to date is a great and easy way to avoid new payment defaults and increase your score.
You also need to create a good credit file. If you don’t have credit or want to improve your reputation, start with secured credit cards or credit creation loans. You can also ask a close relative to add you as an authorized user on their credit card, provided they pay responsibly.