Trying to buy a home with bad credit can be a nightmare. Having bad credit can cause a lot of anxiety for anyone, but especially for someone who is thinking about purchasing their own home. The fact is, buying a new home is an exciting, yet stressful experience, and having poor credit only increases that stress. Most people are still under the belief that you have to have good or great credit and at least 20% down in order to buy a home. This is not true and you don’t always need a large down payment. Let’s be realistic, who has $50k or more stashed away in the bank these days? Not many.
Note: be sure that you have pulled your own credit report before moving on through this article. Before we can really dig into poor credit or good credit, let me make one thing clear: there is no such thing as a single credit score that everyone uses. You won’t be able to bring in the credit report you just pulled, as the Mortgage company will do their own pull, which is different than what your credit report (consumer) looks like. A lender will pull your credit and may see an entirely different score than what you pulled up from another company. This is pretty much a guarantee, but the scores should be somewhat close. This is because most services do not actually use a FICO score, but their own. It could be Experian’s PLUS Score or even VantageScore. However, when you go to apply for a loan, the lender may pull your FICO. It’s not a big deal, but you should be aware of what you’re getting.
Credit Score Scale
The FICO credit scoring scale ranges from 300-850 (based on ‘points’), with 300 being extremely poor and 850 being perfect. Most people are above 600, but there are plenty of people with lower scores than that, of course. If we were to take a simplified look at how credit scores would look like, we’d see something along these lines:
750-850: Excellent Credit
701-749: Good Credit
620-700: Fair Credit
580-619: Poor Credit
300-579: Very Poor
Of course, this is a very general view of how scoring would look to a financial institution, creditor or lender, but that’s how we’ll view the scoring scale for the purpose of this article. Just remember that when a lender pulls your credit they are going to look at more than just your score. They’ll take a look at your credit history, payment history, any charge-off’s, foreclosures, bankruptcies, etc.
Obviously, Foreclosures and Bankruptcies are going to be the biggest concerns, but even those won’t necessarily keep you from getting a home loan, so don’t be discouraged if you’re dealing with these types of negative items on your report.
Understanding Your Credit Report
Your credit report will have plenty of information for you to go over, such as your personal details, accounts, etc. Let’s discuss what you should be doing when viewing your credit report.
1. Look over everything and ensure that your information is all correct. You may find issues with it, so be sure to highlight issues so you can take action later. Look at your personal details, name, social security number, addresses and even date of birth. Be sure that these are all correct. Take a look at your past employers, accounts and even inquiries. Your goal here is to make sure there’s nothing suspicious going on.
2. If you’ve noticed any accounts that you believe are not yours, highlight those as well, as you’ll need those details for the next section. Inquiries can be highlighted, too.
Your goal right now is to ensure that there’s nothing suspicious going on with your credit, but to also ensure that there are no errors listed. These could be incorrect spelling(s) of names, social security number, and even accounts that are listed as derogatory. Highlight anything incorrect, on each credit report, and move on to the next section.
Take Action Now
The best thing to do if you have poor credit is to get started on fixing these issues. If you spot negative items on your report, try disputing them ASAP. Your main focus at this time is to:
1. Clean up your credit to the best of your ability, and as quickly as possible. Your credit is what you’ll need to rely on to get the loan, so this should be the absolute most important thing to concentrate on. Removing negative items will vastly improve your credit score and can take as little as 30 days, if you’re lucky. Of course, if you have a lot of negative items, be sure to be patient and focus on removing as many of these items before you even start thinking about a home loan. Remember: the higher your score, the lower your payment.
2. Do not apply for any new credit whatsoever. A big issue most people will run into, before applying for a loan, is that they will attempt to apply for other credit; anything from credit cards to auto loans. It’s extremely important that you do not apply for anything until after you get approved for your home loan.
3. Do your best to pay off any collections, credit cards, etc. By paying off your credit cards, you’re getting rid of extra debt that could become a problem for some lenders. Also, by staying below the 30% balance threshold (utilization), you will help to boost your credit score and show the lender that you’re not as much of a risk. Keep in mind that credit card balances are debt that increases your risk factor for lenders, so paying them off decreases that risk level for them. If you have a high utilization, such as a 90% balance on all of your revolving accounts (ie, credit cards), this could be a problem for many lenders, as it creates more of a risk to lend you money. Keep your balances below 20% and try to get them even lower than that, if you can. But no matter what, do not close any revolving credit accounts, such as credit cards. These will actually help boost your credit score as long as the balances are low.
Purchasing a home with poor credit can be a bit of a hassle. You may qualify for a loan with a high APR, “special financing” or even denied for the mortgage you need. Since 2008 things have changed and it’s no longer “easy” to qualify for home loans like it once was. If you have the time do your best to go through your credit and get things fixed prior to going through the motions of loan approval. It’s better to spend a few months getting your credit in order than to end up with financing that you will regret a few months down the road.
There are plenty of things you can do to repair your credit and improve your score. Do a quick search and you’ll find plenty of articles to help you get those taken care of. In fact, I have linked a few of those articles within this article.