The Reality of Bad Credit When Buying a Home
Can you buy a home with bad credit? Probably. But if you’re thinking that your less-than-stellar credit is nothing more than a minor bump on the road to homeownership, you’re in for a rude awakening. Even a few hiccups in your credit history can make buying a house tricky, but the good news is, you can always work to improve your credit score.
The costs of bad credit
There are few people who get through life without a blip or two on their credit profile. However, if your blips are more along the lines of a heartbeat and your payment history hasn’t been stellar, mortgage lenders see you as a higher risk. Since lenders know you haven’t paid on time in the past, you’ll face higher interest rates as a borrower.
Credit scores range from 300 to 850. Most people still get a mortgage with a credit score in the low 600s. Programs vary for scores in that range, but even if you can get a mortgage, you’re a higher risk — and that translates into higher interest rates.
Think a slightly higher interest rate isn’t a big deal? Consider this: An interest rate of 4.875% can mean paying an extra $ 16,000 in interest (for the lifetime of the loan) over a borrower whose score earns them a 4.5% interest rate. And that doesn’t take private mortgage insurance into account, which is a requirement for all FHA loans and can add more than $ 100 a month to a mortgage payment.
Improving your credit and prepping for the mortgage process
How can borrowers with less-than-perfect (or even bad) credit get themselves set up to not just qualify for a mortgage, but save money on interest in the long term?
Know where you stand. Many people have no idea what’s on their credit reports. The first step to boosting a bad credit profile is to check yours. Order a copy of your credit report from all three bureaus (Equifax, TransUnion, and Experian). This will let you know if there are errors in need of correcting or collections in need of paying and let you set a budget and strategy for bringing all of your obligations up to date.
Make the commitment. Once you know where you stand with your credit profile and scores, you have to commit to improving them. Many mortgage lenders will ask for a personal statement from borrowers with bad credit to indicate why they feel they’ve become a better lending risk and how they intend to keep their past credit mistakes in the past.
Get on track. It’s not just about getting past obligations caught up and paying current debts on time. This is a great time to hold your debt to a minimum. Keep your credit card balances low, using only 30% of your available credit on any card. Using higher amounts can lower your credit score and tells banks you’re not living within your means. It’s also a prime time to meet with a mortgage professional, who can help you chart a plan of action to prep you for a future mortgage application process. Improving your credit is never a fast process, but it can be a smooth one when you’re armed with good advice and a solid strategy.
Have you overcome a bad credit score to get a home loan? Share what worked for you in the comments below!