Buying a house is a stressful experience under the best of circumstances. On top of the stress of moving, you have to deal with all of the financial details, getting your utilities moved over, and home inspections. The last thing anyone needs is to deal with a painful buying process.
If you have bad credit, this might sound too good to be true. But bad credit isn’t the impenetrable barrier it may appear to be. There are several ways to get a mortgage loan, even if your credit isn’t as good as you’d like it to be.
Here’s a quick overview of the options you have, and an explanation of how the process works. The more you know about how your credit score affects your mortgage, the better equipped you’ll be to find a lender that’s right for you.
Before we talk about what to do if you have bad credit, let’s talk about what “bad” credit actually is. Experian considers a “fair” credit score to be anything from 580 to 669, while anything from 300 to 579 is considered “poor.” So, do you need a credit score of 580 to qualify for a loan? Or do you need a score of 670?
The good news is that it depends. If your score is 670 or higher, you’ll qualify for most any mortgage, provided you can afford the monthly payment. The further your credit rating falls below 670, the fewer options are available. Nonetheless, there are still plenty of choices for the savvy buyer.
Most lenders look at several other factors when processing an application for a home loan. These include:
- A sizeable down payment. The larger percentage of the house you can pay for out of pocket, the lower the risk to the bank. If you have the ability to put down a sizeable down payment, you may qualify for a loan despite poor credit.
- Your current amount of debt. If you have poor credit but little or no debt, you have more ability to pay than someone who is seriously indebted.
- Your current income. The more you earn, the larger the monthly payment you can afford.
The better you perform on these measurements, the better terms you’ll be able to qualify for. But credit score is still the most important factor.
That said, the numbers don’t always tell the whole story. What if, for instance, you just got a big raise, but past pay stubs and tax returns don’t reflect that? In that case, a human underwriter may be able to look at your application. This is a process called manual underwriting.
Manual underwriting can be useful to many people with bad credit. But it can also be helpful for people with no credit. However, some companies offer specialized loans to people with no credit score.
Here’s a list of alternative credit sources you can use to qualify for a home loan:
- Rent and utility receipts
- A 12-month record of savings deposits showing an increase in balance
- Health insurance payments
- Auto insurance payments
- Hold a life insurance policy
- Carry homeowners or renter’s insurance
- On-time rental payments
- On-time medical bill payments
If you have any record of these types of payments, you can qualify for a home loan even if you have no credit. However, your interest rate will still be higher than someone with good credit.
Another way to build credit is simply to take out a credit card at a gas station. Use it for gas, and pay the entire balance off every month. You buy gas anyway, and the monthly payments will quickly boost your credit rating.
Whether or not your credit score is truly “bad” will depend on your lender. If you want a hard and fast lower limit, it’s somewhere around 500. Below 500, you need to boost your credit score before you can expect to get a mortgage. That said, it never hurts to try.
Above 500, different lenders have different standards. Some offer loans for lower credit scores at higher interest rates and some simply set a higher threshold.
One additional thing to keep in mind is to be careful about taking on new debt before you’ve closed on your house. Just because you’ve been pre-approved for a loan doesn’t mean you can take out a new credit card to pay for professional movers. Your underwriter will see the extra debt and may refuse to approve your loan.
There are three main types of mortgage loans. Let’s take a look at each one, and see how they work for people with bad, fair, or no credit.
The most prevalent type of mortgage loan is a conventional loan, which is funded directly by the bank. These loans carry some of the most generous terms but are only usually available if your credit score is about 620 or higher.
As before, keep in mind that other factors can affect your loan terms. If you have a large down payment or a recent increase in income, it’s worth applying even if your credit score is a bit lower.
The next type of loan is an FHA loan. FHA loans are guaranteed by the Federal Housing Administration (FHA). It’s available to most first-time homebuyers, as well as people who haven’t purchased a new home in the last three years.
Because the loans are federally guaranteed, most lenders will allow you to take an FHA loan as long as your a credit score is above 580, and some will even go as low as 500. If your score is below 580, expect the lender to ask for a 10% down payment.
VA loans are exclusively available to US veterans or active-duty service members. However, they allow service members, veterans, and their spouses to buy homes with no money down. The credit score requirements for a VA loan vary by lender. But if you qualify for one, it’s probably going to get you the best rate.