Home > Blog > Large down payment, FNA loans, or loan repayments. How to buy a house with a bad credit score?

Large down payment, FNA loans, or loan repayments. How to buy a house with a bad credit score?

Bad credit is not a death sentence. We are all different, and our credit histories are also different. Therefore, there are many proven ways to improve your credit score. And just as many ways to get a mortgage with a low credit score (and without even boosting it). So, how to buy a house with a bad credit score?

What is a bad credit score?

First, let’s understand this concept.

When you apply for a mortgage, one of the primary things lenders will consider is your credit score.

This is a number from 350 to 850, which shows your ability to pay. When you apply for a loan, the lender will assess your credit score to determine the probability of paying your bills on time. Generally, a score below 620 is considered low.

Credit scores are determined using either the FICO (Fair Isaac Corporation) or VantageScore 3.0 scoring system.

FICO Score Ranges

  • Very Poor — 300 to 579
  • Fair — 580 to 669
  • Good — 670 to 739
  • Very Good — 740 to 799
  • Exceptional — 800 to 850

VantageScore 3.0 Ranges

  • Very Poor — 300 to 499
  • Poor — 500 to 600
  • Fair — 601 to 660
  • Good — 661 to 780
  • Excellent — 781 to 850

What affects your credit score?

Depending on your credit history, the score may change. And here are a few parameters that affect the figure:

  • credit history
  • the proportion of debt to credit that you possess
  • credit history age
  • your loans variety
  • number of credit accounts

How to buy a house with bad credit?

Again, bad credit is not the end. You can still become a homeowner and receive funding. To obtain a loan with a credit score ranging from “very poor” to “satisfactory or poor,” the key is to find a suitable lender willing to collaborate with you.

Steps to Buying a Home with a Bad Credit Score 

Check your credit report and credit score

The one who owns the information owns the world. And this quote also works for credit scores. The first step is to check what information is on your credit report. After all, it affects your credit score.

You can request a copy of your credit report from credit bureaus:

  • Experian
  • Transunion
  • Equifax

How to check a credit report?

  • Through Annualcreditreport.com, you can request a free credit report from one of the credit bureaus once a year.
  • Next, carefully review the document to ensure the accuracy of all information, as errors are commonly found in this area.
  • Please be aware that any inaccurate information must be removed, which may impact your score.

How to check credit scores?

  • Offline — at any credit bureau
  • Online — free on sites like Credit Karma

Determine what kind of loan you can get even with a bad score

Believe us, there are many such programs! You can find a mortgage loan with different minimum score requirements. Those that offer more flexible terms for borrowers with poor credit history.

FHA loans

Federal Housing Administration loans are for borrowers with lower credit scores and down payments. At the same time, the numbers could be completely different.

For example, borrowers with a credit score of 580 and a 3.5% down payment can apply for such a loan. And also borrowers with a score of 500 or more but a higher down payment — 10%.

What other requirements are needed for an FHA loan:

  • stable income
  • employment confirmation
  • debt-to-income ratio — no more than 43%

VA credits

These loans come from various lenders and are insured by the Department of Veterans Affairs. Veterans, active or retired military personnel, and their spouses are eligible for this loan.

The VA does not set minimum credit rating requirements, but lenders do. In some cases, the minimum score is 580. In others, it may be 660. Therefore, consider this point before applying for a mortgage. Another important point is that VA loans do not require a down payment.

USDA credits

USDA loan programs are designed for low to moderate-income buyers. Buying a house in a suburban or rural area throughout the country is the main condition.

There are two types of USDA programs:

  • A private mortgage lender provides the loan. The minimum score is 640. A score of 600 is also possible, but you must go through the underwriting process manually.
  • A direct loan funded by the USDA. There are no credit score requirements, and the loan is for people with very low incomes. But you will need to prove that you can pay the monthly payments.

None of the options require a down payment.

Conventional loans

These are loans that are not part of the state loan program. Banks, private lenders, non-bank lenders, and credit unions can offer them.

There are two types of conventional loans:

  • Conforming — credits are eligible for purchase at Fannie Mae and Freddie Mac. Such loans usually require a minimum of 620 and sometimes even higher.
  • Non-conforming loans — designed for loan amounts that exceed the limits. They are also called jumbo loans, and you need a high score to get them.

Large down payment

If you have a low credit score but enough money for a down payment, that’s okay. Lenders trust these borrowers because they have more equity from the start.

Also, lenders must understand that you are not spending all your money buying a house. Having savings indicates that you will be able to cover unexpected expenses that may arise. For example, you will not need a loan to make repairs.

Many lenders seek enough savings to cover as little as six mortgage payments.

Pay off your debt

Yes, it’s that simple! It’s time to pay the bills. This is the most effective way to improve your loan chances.

Pay your loans on time and try to make payments. Student, personal, car loans, and credit card debt will help reduce your debt-to-credit ratio.

Do not close or open new accounts

This can negatively affect your credit score. This will reduce your available credit limit, affecting your credit utilization rate. Ideally, it should not exceed 30%.

A new credit score can also negatively affect mortgage loan approval. This signals the lender that you rely on new loans to solve your financial problems.

Find a co-signer

Any trusted person with a high credit score, such as a friend or family member, can become a mortgage guarantor.

Adding a loan co-signer is a serious and responsible decision. Because, in case of problems, your guarantor will be responsible for paying off your loan.

Always Compare Options

Comparing different mortgage lenders can help you find a low-interest rate or get lower monthly payments.

For example, you can implement a similar strategy: pre-qualify with several banks and compare their offers.

How to buy a house with a bad credit score? Conclusion

Buying a house if you have a bad credit history is absolutely possible. Although a little more difficult. It’s always good to keep in mind that having a higher credit score can help you secure lower interest rates when applying for loans. Don’t let your credit score limit your home purchase. For all the information you need about credit scores and how to get financing to buy your dream home, LBC Mortgage is the place to consult!

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