Ready to purchase a home but afraid your credit score will hold you back? Some lenders have stringent requirements that make it hard to get approved. Many others have mortgage products that are tailored to potential borrowers with credit challenges.
Keep in mind that even if you are approved, you will pay higher interest rates if you have bad credit. So, it’s best to take a few actions before applying for a home loan so that you save money in the long haul. You’ll also strengthen your approval odds.
We’ll go over how to buy a house with bad credit and then share top tips for improving your score in the meantime. Here are a few tips to help you get started
1. Monitor credit score
When was the last time you checked your credit score? If it’s been a while, you’ll want to take a peek at where you stand before sitting down with a lender.
Ideally, your score should be at least 670 for the best odds of approval. A good credit score is usually at least 670 or higher, with the average good score being around 700.
If your score is on the lower end, you may have more difficulty getting approved for a mortgage. You might also find yourself stuck with a higher interest rate.
Also, know that the score you see may not be what the lender sees. Don’t be alarmed if their figure is slightly higher or lower when you start applying for loans.
You may also want to review your credit score from other credit bureaus to see where you stand since scores tend to differ by bureaus. You can access your free credit report from Annual Credit Report or myFICO for a small fee.
2. Begin improving your credit score
It’s possible to get a mortgage even with bad credit, but that doesn’t mean you should do it. Having bad credit sets you up for high-interest rates that’ll ultimately have you paying more down the line.
Some lenders may suggest you lock in whatever interest rate you can get now and refinance once your score improves. This is one possible strategy, but keep in mind that refinancing often comes with its own closing costs and fees, both of which can leave you shelling out thousands.
The best strategy is to wait to apply for a mortgage until your score improves. This may sound like a daunting task, but it doesn’t have to be. By paying off your most expensive debts, budgeting, using credit tracking tools, and securing a Credit Builder Plus loan from MoneyLion, you’ll be amazed by the results.
A Credit Builder Loan from MoneyLion does not require a credit check, and over half of borrowers raise their credit by 42 points or more within 60 days. Read up on how to improve your credit score fast here.
3. Dispute errors on your credit report
The information in your credit report is used to calculate your three-digit score. If there is inaccurate or untimely data in your report, your credit score could suffer.
Visit Annual Credit Report to get a copy of your free credit report from the three primary credit bureaus: Experian, Equifax, and TransUnion. Highlight any errors or dated negative information that you see before filing disputes. For an easier way to fix errors, try our partner, Dovly. It’s easy to sign up for Dovly online. From there, Dovly will immediately start working with all three credit bureaus to remove errors from your credit report and repair your credit score.
Refrain from disputing accurate information, even if it’s negative, as this practice is illegal. You also run the risk of credit bureaus throwing out future disputes that are valid. When reviewing your credit report, pay attention to negative items that are both accurate and timely. Remember to rectify any issues before applying for a mortgage.
4. Research lenders
Do your homework to find lenders that could work for you. Peruse their websites to view the loan products they offer and reach out by phone to speak with a mortgage loan originator. Explain your situation and inquire about loan products that may be available to you.
Make sure to ask about government-backed mortgage products, like FHA, USDA, and VA loans.
These programs are ideal for subprime borrowers or individuals with bad credit. Here’s a closer look at these loan products:
- FHA loans are backed by the Federal Housing Administration and they require a down payment of 3.5% or 10% if your credit score is between 500 and 579.
- USDA loans are available for rural home purchases and they offer 100% financing.
- VA loans are backed by the Department of Veteran Affairs and they don’t require a downpayment or private mortgage insurance.
5. Shop for the best rates
Applying for many credit accounts in a small time frame can hurt your score. However, there’s an exception to the rule when it comes to mortgage loans. According to myFICO, “most credit scores are not affected by multiple inquiries from [mortgage] lenders within a short [period].” So, it’s worthwhile to shop around with different lenders to find the best rate.
6. Hire a mortgage broker
Consider bringing a mortgage broker to assist with your search. They charge a small fee for their services but they’re able to find lenders in their network who can assist with your home loan needs. They are normally able to find lenders that want to work with you rather than you having to apply with multiple lenders yourself.
7. Use cash downpayment
Unless you qualify for a down payment grant, you will need to put cash on the table to secure a mortgage. The lender will have communicated the percentage of the purchase price that you will have to fork over, but that’s not the only amount you have to worry about.
You must also have additional funds for closing costs and prepaid expenses like taxes because sellers typically do not cover these expenses. Some lenders also require three to six months of reserves in the amount of the mortgage payment, though this amount could be higher if your credit score is very low.
Your Mortgage Starts with Your Credit Score
Buying a home can be a long and tedious process, so getting your finances in order is key. Knowing your credit score and improving it to secure the best possible interest rate are the first two steps in applying for a mortgage.
If you need some help improving your credit score, apply for a Credit Builder loan from MoneyLion. It can help you build your credit fast and improve your chances of getting approved for a mortgage.
Once you are in the suitable credit range for your lender, your hard work will finally pay off because you’ll be able to secure a mortgage loan. Remember to ask your lender, broker, or real estate agent about any questions you have throughout the process. That’s what they’re there for!