If you're worried that your credit is too low to get approved for a home loan, you're not alone. Low or bad credit is something that many Americans are facing. But even with poor credit, there is good news! There are government loan programs made for borrowers with lower credit.
Also, consider that poor credit is not a permanent situation. Starting right now, you can increase your chances of getting approved for a loan by raising your credit score.
Credit score, also called a FICO score, is a three-digit number that rates your creditworthiness. It's based on your credit history, and it tells lenders the probability of you repaying your debts. The higher the score, the more likely it is that you'll pay back your loan.
A low credit score implies that you're a higher risk for the lender. Usually, a low credit score means paying a higher interest rate. However, if your FICO score is very low, you may be too much of a risk at the moment, and your mortgage application will be denied.
Here is a breakdown of credit scores:
Exceptional credit = 800 and above
Very good credit = 740 to 800
Good credit =670 to 740
Fair credit = 580 to 670
Poor credit = under 580
If you find yourself in the "poor credit" category, you still options for buying a home. The minimum score needed depends on the loan type. For example, the minimum score for a conventional loan is 620, but an FHA loan allows for a credit score as low as 580. Other factors go into loan approval. We also consider you downpayment amount and your income. In other words, poor credit does not automatically exclude you from getting a home loan.
You can request a free copy of your credit report every year from each of the three credit reporting companies: Transunion, Experian, and Equifax.
A pre-qualification with us also comes with a "soft" inquiry. This type of credit inquiry does not affect your credit score. However, it does allow for you to get an idea of which loan programs you qualify for, the possible rate, and a ballpark range of how much you are eligible to borrow.
If your score is low enough that you cannot get approved for a loan, the next steps are to take a few months to concentrate on raising your credit. The surest ways to raise your score include making timely payments, paying more than the minimum every month, dispute errors, and don't open any more credit.
Here are a few more tips for raising your credit score:
Purchasing a home with bad credit can be difficult, but it's not impossible! Government-backed loans, such as FHA and USDA loans, are designed for borrowers that need more lenient requirements. Plus, raising your credit score can happen relatively quickly with a few months of dedicated work.
Curious as to how close you are to buying a home? Pre-qualify by filling out our simple online questionnaire, and you'll know exactly where you stand.