Does your credit score have you thinking that buying a home is out of reach? Such a large monetary commitment can be scary, and if you’ve made some bad financial decisions in the past, then dragging around a bad credit score can feel like an insurmountable challenge. But don’t panic, feel defeated or write homeownership off just yet. There are still some ways you can purchase a home with bad credit. It’s also important to understand that everyone’s situation is different, and there’s no magical formula. Lenders don’t just look at your asset to debt ratio in a silo, and they understand that everyone’s situation is unique, which they consider when offering options.
Anything below 580 is considered a poor credit score. But if you fall into that camp, don’t fret. There is technically no minimum credit score required to secure a home loan; the catch is that most lenders set their own minimums. If your score is below 500, it’ll be essential to raise that number before applying for a loan.
Improving your credit score won’t happen overnight and is a process that can take years, so you’ll need to plan ahead. Regardless, it is essential to getting better rates and options when it comes to loans. Here’s what you need to do to boost your score:
There is no “secret sauce” or magic number needed to buy a house. Lenders aren’t just looking at your credit score on its own; they are also considering other things such as your down payment amount. Being able to put a 10% cash down payment will help you tremendously. They also look at your overall debt amount of debt (the lower the better), your annual income (the higher the better), and if you’ve been sent to collections (try to avoid this at all costs).
A good ballpark score needed to obtain a conventional loan is around 620. Of course, if you have more income or a higher down payment, you will most likely still qualify even if you’re a few points short. If your credit score is around 580, then an FHA loan backed by the Federal Housing Administration is your best bet. Lower scores (like 500 to 579) will need a 10% down payment to qualify.
Buyers with bad credit can expect to pay a higher monthly payment due to higher interest rates as the lender is taking on more risk for loaning to you. Still, if you commit to improving your credit score and stick with it, you’ll likely be able to refinance in a few years, which will essentially allow you to renegotiate your loan terms.