A good credit history increases your chances of a home loan approval, but you can still buy a home with bad credit.
Establishing and maintaining a good credit history increases your chances of getting approved for a home loan. You can, however, buy a home with bad credit. The aftermath of the financial crisis and the collapse of the nation’s housing market in 2007-2008 opened up a few new possibilities for potential homebuyers with bad credit. If you believe your credit rating is hampering your efforts to buy a home, here are a few steps you can take to repair your credit and find options for buying a home when your credit is not great:
Know your credit score
One of the first steps you should take in addressing your credit is to actually know what your credit rating or credit score is. The Fair Isaac Corporation (FICO) was established in 1958 and began offering technical, data analysis for businesses. In 1958, the company created the nation’s first credit scoring system and today that company compiles and sells data on consumer credit activity and behavior. FICO essentially boils down your credit history into a detailed report on how you borrow and repay your debts, then assigns a single three-digit number grading that behavior (your FICO or credit score.)
The FICO scale ranges from a low 300 to a high 850. The higher your score, the more likely you will qualify for the lowest interest rates and the most favorable treatment when seeking credit. FICO gives its formula to the nation’s three primary credit bureaus—Equifax, Experian, and TransUnion—and each of these bureaus applies its own formula to your credit reports. Each credit bureau pulls information from a slightly different network of lenders to compile its own report on you. FICO earns a small royalty for each score the bureaus sell to lenders. As a result, you actually have three major FICO scores, one from each of the bureaus, and they can vary by as many as 50 points.
You are entitled to one free credit report from each of the bureaus once a year. If you don’t want to go through the formal process of requesting your annual, free credit report, there are a growing number of online and direct services offering to compile and sell you detailed information about your credit reporting. For example, you can get the FICO scores based on your TransUnion and Equifax credit reports from the folks at www.myfico.com for about $15 - $20each. (Experian no longer sells its FICO scores to individuals.)
Read you reports carefully...and challenge all credit errors
It isn't uncommon for your credit report to have errors. After you’ve requested and received your credit report(s), read carefully. Highlight and catalogue any and all errors you find or even any questionable items. If you think that a reported delinquency or some other negative item is inaccurate, you can submit a credit dispute form to the credit bureau. If you prove the information is incorrect, the credit bureau is required to remove it and readjust your credit score. It can easily take a month (or more) to get disputes resolved and the issue removed from your report. If you do find mistakes on your credit report and you are hoping to challenge and resolve them, you may want to wait to resolve them before you apply for a home loan.
Some items may be more important for resolving than others. If you find mistakes on your credit score, it may help to know how much weight credit bureaus place on certain issues and types of behavior. In general, here’s the percentage of “weight” given to major categories of credit behavior when an agency is assigning you a credit score:
- Payment history, 35 percent – credit bureaus will factor in when you last paid an account late, how often you pay late, and by how many days.
- Total debt, 30 percent – credit bureaus will look at how much debt you’re carrying and in general, carrying a higher debt load works against you. Lenders will also look what they refer to as your usage ratio or how much debt you owe on your credit cards compared with the total amount you could borrow.
- Duration/longevity, 15 percent – the longer you've had an account, the better and the more forgiving the credit bureaus will be on possibly negative activity on a long-held account. For example, a late payment on a two-year-old account will hurt your score more than if you’ve had a credit card for two decades and recently made a late payment.
- New credit requests, 10 percent – if you make frequent, multiple requests for credit you’re going to be considered a greater credit risk. FICO looks at the number of new accounts that you have opened as well as the number of requests, or inquiries (there are two kinds), for your credit score or report. What credit agencies refer to as hard inquiries—when you actually apply for new credit—can ding your score.
- Types of credit, 10 percent – credit bureaus looks at the number and quality of each type of account. For instance, a credit card from a national bank carries more weight than one from a department store and revolving accounts (credit cards) tend to count more than installment loans (mortgages, car loans, student loans) because they’re better predictors of your debt management.
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Research HUD loan programs
The U.S. Department of Housing and Urban Development (HUD) is a federal agency that may be able to help you if you are seeking a home loan and have weak or bad credit. The Federal; Housing Authority (FHA) is an agency within HUD and its primary purpose is to back and offer home loans for folks in a variety of situations where more traditional lenders or lending requirements may not apply. There are HUD and FHA counselors in every part of country who can help you find out how you can buy a home with bad credit.
These agencies have various programs to help people with lower incomes, with poor credit histories or even no credit histories, buy homes. You can also ask counselors sponsored and supported by these agencies if buying a foreclosed home presents an opportunity.
Although you may be considered a higher risk by lenders when you have bad credit, many will still give you a home loan, depending on the reasons you have bad credit. They may charge you a higher interest rate, or require a shorter time for which you have to pay back the loan. Check with the Better Business Bureau for any reports against any company you seek a loan from it, especially if it is not a major lender.
Go to this article to learn six steps to help you be prepared and buy affordable housing.
Spend less or put down more
Your chances of getting approved for a home loan are better if you request a smaller loan amount, even if you have poor or damaged credit. You may want to consider buying a less expensive home. If the home is in need of repair, you may be eligible for the 203(k) rehab loan offered by FHA/HUD. This kind of loan is given to encourage homeowners to contribute to the revitalization of the neighborhood by repairing a home in a poor condition. There are also a growing number of loan-assistance and even grant programs available to homebuyers willing to buy a foreclosed property in a distressed or select neighborhood. These programs offer incentives ranging from outright funding to purchase a property to low-down, low-interest and lower-standards-for-qualifying loans.
Have you considered a lease-to-own option? Read more about the pros and cons of buying with a lease option in this article.
You can also improve your chances of getting a home loan by making a bigger down payment. This reduces the risk to your lender because it gives you less money. Ordinary home loans typically require a minimum down payment of 20 percent, while the down payment for most FHA loans may as little as 3.5 percent. If you are ready to find real estate listings and home loan providers in your area, go to Reply! today.
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