Anyone can have bad credit. Max out some credit cards, pay a few bills late or miss the payments, and suddenly your credit score has dropped. Getting a loan is difficult when your credit score is low, especially a mortgage loan, and you are likely going to have a higher interest rate than someone with better credit. However, it is not impossible to get a mortgage loan with bad credit.
What Credit Score Do I Need?
There are many different types of home loans available, each of which has a different minimum credit score requirement. An FHA loan has a minimum score of 500. The Fannie Mae Home Ready loan requires a minimum score of 620. The Freddie Mac Home Possible loan requires a score of 660. USDA loans require a minimum of 581. The VA loans do not have a minimum score, but the individual lenders you obtain the loan from may have a minimum credit requirement.
Each of these loans has its own special requirements to obtain the loan, and most of them have specific time limits between when a significant credit event occurred and when you can obtain the loan.
Unless you are a veteran, if you have bad credit, your best bet to obtain a loan is the FHA loan. These have become a popular choice for first time home buyers and those with bad credit, because they only require a score of 500, with a down payment of 10 percent or more. You can further lower the down payment if your credit is at least 580, reducing the payment to 3.5 percent.
Repairing Your Credit to Get a Loan
Repairing your credit may sound like a daunting task, and many find it overwhelming. It can be easier than you may think though. Credit scores change regularly, so when you decide to buy a home, you can begin to take steps to bring it up. Even if you only get your score up by a few points, those few points can help shave off a little bit of interest from your loan.
One thing you can do to help you get everything in order is talking to a credit counselor. They can review your credit history and your financial situation to give you advice on what you can do to improve your score.
Another thing you can do is look closely at your credit reports and see if there are any errors in it. If you find any, you can submit a dispute to have them removed from your credit report. A 2012 study showed that 25 percent of people had an error in their credit report that was negatively impacting their score. With that in mind, it is important to look over your credit report to make sure there are no errors hiding to hurt your score. Generally, these errors are not hurting the score by much, but some people had their scores increase by 25 points; one in 250 people even saw their score go up by 100 points.
Make sure you are making your payments on your bills on time, especially those that can harm your credit score, like student loans or a credit card. This alone can help boost your credit.
Pay Down Debt
When you apply for a loan, one thing lenders will look at is your debt-to-income ratio (DTI). Your DTI is a percentage based on your total income and your total debt, what you are paying out. Try to make it as low as possible by either reducing the amount you are paying each month or by increasing your income. Sometimes this is easier said than done, but a credit counselor may be able to help you with that.
Major Credit Events
A major credit event is something drastic that has a huge impact on your credit score, like declaring bankruptcy or having your house foreclosed on.
You can still get a mortgage after declaring bankruptcy, but there is a waiting period before that can happen. During the waiting period, make sure you are making your payments for things on time and try not to open new credit; if you have to open a new line of credit, try to keep it as minimal as possible.
If you have had a foreclosure, the waiting period is significantly longer than it is for any other credit issues. If there were extenuating circumstances that led to the foreclosure, you may be able to get an exception to the loan. Before talking to a loan officer, make sure you have the date of the trustee’s sale because credit reports can often list the date the foreclosure began, instead of when it was final.
It is not impossible to get a home loan with a poor credit score, but you will have a higher interest rate than someone with better credit. Working on improving your credit score is the best way to get yourself a better loan, though it can be difficult at first. Bringing a larger down payment to the table can also help impact your ability to obtain a loan with poor credit.