A large purchase can seem quite daunting, especially if your credit score isn’t the best. The good news is, having a lower credit score doesn’t completely eliminate your chances of qualifying for a loan. There are plenty of options for homebuyers with low scores, high scores and all scores in between.
Set yourself up for loan success by getting your personal finances and credit score in check
When preparing to invest in a home, one thing you can do to set yourself up for success is to get your personal finances in check early on. Here’s what we recommend:
This isn’t always easy. In fact, about 80% of Americans have some form of debt. While it may not be possible to get rid of all of your debt, minimizing it even slightly could help your credit score. When applying for loans, lenders like to see that an individual’s overall debt is less than 30% of their income. The lower the debt-to-income ratio, the better off you’ll be.
Avoid Extra Credit Inquiries
About 6 months before applying for a loan, try to avoid hard credit inquiries. A hard inquiry means applying for credit like another loan, a credit card, or even switching mobile providers. When your credit report shows a lot of hard inquiries, not only does it lower your credit score but it can also deem you as being a “high risk” candidate to a lender–meaning they’re less likely to loan you money. These hard inquiries are not to be confused with soft inquiries, however. Soft inquiries are when you inquire about your credit score yourself and these will not lower your score.
Pay Bills On Time
Did you know that paying your statements on time makes up 30% of your credit score average? This is one of the easiest way to maintain a healthy credit score but sometimes one of the easiest to forget. A good solution offered by many utility and billing companies is to set up an automatic-pay. This is a great way to get your finances right without having to think twice about it!
As mentioned above, when a lender is determining whether or not to offer you a home loan, a huge factor they look at is your credit risk. Credit risk is the potential that a borrower (you) will fail to meet the payments on the money being loaned. This is why a good financial history can do wonders for obtaining a decent loan.
Home loans for any credit score
Generally, a lower credit score means higher mortgage rates. Luckily, home loans come in all different shapes and sizes. The type of loan you choose for financing your home depends a lot on what your circumstances are. Conventional and FHA (Federal Housing Administration) loans are two common types of loans that people use to finance their homes.
Conventional loans typically require a credit score of 620 or higher that conform to the guidelines of private companies like Freddie Mac or Fannie Mae. This loan is great for individuals who have the resources for a larger down payment upfront and who have a strong financial track record.The great thing about conventional loans is that they generally don’t require mortgage insurance thanks to the higher down payment you’re required to make.
Government-Insured or FHA Mortgages
Government-insured loans like FHA require a credit score minimum of 500 as compared to the 620 or higher required for conventional loans. These loans are often easier to obtain due the lower credit score minimum and require a lower down payment than conventional loans do.
However, FHA loans require a mortgage insurance premium that can last for several years, making them a little pricier than they initially seem. This type of loan is best suited for buyers who are just starting out financially or who have limited resources available for a bigger down payment–typically first time home buyers!
As you can see, credit scores and loans are an integral part of investing in a home. The better off you are credit-wise, the better off you’ll be financing a home. We’ve talked a lot about good things to do when buying a home but what we haven’t talked about are the things to avoid. Take a look at our blog about what not to do when you’re about to buy a home to prepare yourself even more for the home-buying process.
Confused by any of the terminology, lingo, or processes we described throughout this blog? We would hate for you to leave us even more confused. That’s why we created this Decoding Real Estate guide which simplifies all things real estate–from common terms to abbreviations, even tricky processes.