You’re so over wasting your money on rent. You would rather put that money towards your home so you can start building equity instead of just throwing that money out. However you may have bad credit, and you may be worried about what that looks like when it’s time to purchase your home. Even if you do have low credit you may have to face the fact that you will have higher interest rates and may need a larger down payment.
Buying a home is already difficult enough, especially since the new 2018 tax code that has impacted the financial equation of many Americans. These are 6 tips that can help you navigate the tricky world of credit when buying your home when your credit score may not be up to par.
1- Know Your Credit ScoreIn order to understand your score, you need to know your score! You can get your FICO credit score for free in numerous places, usually offered by your credit card provider, your bank, and/or websites like Credit Karma. Your score consists of three major credit scores: Equifax, TransUnion, and Experian. It is best that you know all three so that you have a better understanding of what your credit entails.
Once you check your score you need to understand what is considered a bad score. FICO credit scores range from as low as 300 to a perfect score of 850. A majority of lenders consider scores of 740 or higher to be optimal. However any score that 640 or less, may make lenders more cautious when providing you with something.
2- Double Check the Accuracy of the Credit ReportYou checked your credit score but now it is time to check your credit report! Your credit score is calculated based on the information of your credit report. Your credit report is just a history of how you’ve handled the money that you have borrowed. Sometimes though, errors can happen. When you have these errors, they can hurt your credit score.
In order to get a detailed credit report, every 12 months you can go to a credit reporting company to make sure the information on the report is not only accurate but up to date as well! If you happen to find any errors then you can dispute all of them with the credit bureaus!
3- Accept the Fact You May Have Higher Interest RatesYou may still be eligible for a mortgage even though you have a bad credit score if you are willing to pay higher interest rates. The reason lenders prefer to charge consumers with lower credit score higher interest rates is so that they can protect themselves. When you have a higher interest rate, you have a higher mortgage payment so even if you may be willing to pay the extra money, you need to make sure it stays within your budget!
4- Apply for an FHA loanFHA loans are loans that are insured by the Federal Housing Administration that are meant for individuals with lower credit scores because these loans have less credit requirements. You can qualify for this type of loan with just a down payment of 3.5% of the home’s final purchase price with a score of 580. This gives you a lot of legroom, however there are some important things to note about this type of loan.
FHA loans have financial penalties, must have private mortgage insurance, and they may opt in for consumers with higher credit scores even though they can accept applicants with scores as low as 500. Knowing these downsides is imperative when applying to this type of loan!
5- Have a Larger Down PaymentLenders are more willing to lend to you, if you provide a larger down payment. Larger down payments for individuals with bad credit can be the key component that changes a rejection to an approval.
The reason is similar to why lenders charge a higher interest rate, it is to prove to lenders that you are serious about this loan. You will prove to the lender that you are willing to experience more of the risk with a higher down payment as well as prove to the lender that you are less likely to walk away from the loan since more of your money is in it.
If your down payment is at least 20% or more on the purchase of your home then you will increase your chances at getting approved even with the bad credit score.
6- Start Rebuilding Your CreditUnfortunately, sometimes credit may be too bad to buy a home. If that’s the case then you will need to rebuild your credit before applying to get a loan. While it may seem daunting, rebuilding credit is actually manageable. You just need to pay your bills on time every month, and make sure your debt doesn’t get too out of hand on your credit card. An ideal utilization for your credit card should be between 20-30%. Scores don’t change overnight but as long as you are disciplined in paying back your debt you should see your score go up slowly but surely!