Your credit score is an important factor that mortgage lenders consider when you want to get a first time home loan with a poor credit history. But if you find that you have a lower score than you would like and want to buy a home, there is still hope for you, don’t worry.
We are in 2018, and it is easier than a few years ago to get a 1st time home loan with bad credit. For example, did you know that 96% of people with a low 580 credit score get approved for an FHA loan? Just because you are a first time home buyer with low credit scores doesn’t mean you get approved for house financing.
To maximize your odds of getting a first-time home loan approval with a bad credit score, experts advise you pay attention to the following tips:
1. Know the Credit Score You Need
As you know, how high or low your credit score is, has a major effect on whether you can get approved for a home loan and what the rate will be. For the most part, people with higher credit scores of 680 or higher will have more attractive mortgage options than people with lower scores. With Quicken Loans, the best mortgage options are for those with a 660 or higher credit score. However, the minimum FHA credit score will vary between brokers and lenders, depending on the finance companies comfort level with first time home buyers and credit scores.
If you want to get a conventional loan and have no mortgage insurance, you have to have at least a 620 and higher is better, plus a down payment of 20%. Getting a home loan with a lower score is often possible, but mortgage insurance will usually be needed unless you have a 20% down payment.
But if you have lower credit in the low to mid-600’s, you may find that the aforementioned FHA loan might be your best choice. With a loan that is backed by the Federal Housing Administration, you do not need to have a high credit score at all. A 580-credit score is the minimum needed to have a 3.5% down payment, and you still can get a first time home loan with a lower score than that, down to 500. But you will have to pony up a 10% down payment.
In most instances, with limited or poor credit you will need to be able to provide income documentation to the mortgage underwriter. In most cases, stated-income loans will require a borrower to demonstrate good credit.
2. See How Long Since that Foreclosure or Bankruptcy
After the mortgage meltdown of 2008, a major problem for many people was they had a bankruptcy or foreclosure. This will put a big black mark on your credit report for at least seven years. But this in no way means that you cannot buy a home while that negative mark is on your report.
To qualify for low FHA mortgage rates, you usually will need to have a waiting period of two years before you can buy another home. This includes both a foreclosure and a bankruptcy. Your FHA lender mainly wants to see that you are financially stable for the last year or two before they decide to loan you money. You should have a steady history for the previous 12-24 months of paying your bills.
3. Check for Credit Errors
You always should get a copy of your credit report at least a year before you want to get a home loan. People might think this is not necessary, but you would be wrong; there are errors on a high number of credit reports. And some of those errors can affect your credit score negatively.
For example, it is possible to have a negative item reported to your credit more than once. It also is possible that you might have had a credit card opened in your name and were not aware of it. It could be hurting your credit score.
If you do discover that there is a mistake on your report, you can file a written dispute with the credit bureau. If they agree that the item is an error, they will remove it and will inform you that they did so. Once you file a dispute with a credit bureau, they are good about getting back to you within a month or two.
4. Save More for a Down Payment
The old adage is money talks, and this is true with mortgage loans and bad credit! The more money you can bring into the deal, the more the mortgage lender is willing to overlook your credit score. From the lender’s perspective, you are less risky if you have more money in the home as you are more likely to make the payments and not default.
If you do not have a lot of cash and have a bad credit score, consider liquidating some retirement savings or other assets to get the higher down payment you need. Or, see if you can get a gift from a family member. Many first-time buyers get financial help from family to help them with their first down payment. You will need to get a letter from the family member or friend to certify that this is a gift and not a loan, however.
5. Find a Co-Signer
For people who have really bad credit in the 500s, you may need to get a co-borrower for your loan. This means that your friend or relative is guaranteeing the loan. So, if you fail to pay, that person is financially responsible for the loan. This is a very serious commitment and not something that you or the other person should take lightly. Many first time home buyers with bad credit start off with a co-signer. This helps them re-establish credit while they are reaping the benefits of home ownership.
6. Check Your Debt to Income Ratio
Most lenders want to see that your debt to income ratio does not exceed 43-45%. This means that all of your debt payments, including your proposed mortgage payment, will not exceed 43-45% of your gross monthly income. If are a first time buyer with bad credit and your DTI is well above that threshold, you may want to increase your income or decrease your debt. Or both.
Know that when you pay off a big credit card balance, your score will easily increase by 30 or 40 points.
7. Keep Renting
If your score is 500 or lower, you probably cannot even qualify for a first-time home loan with bad credit. It is perfectly OK to continue to rent for one or two more years and rebuild your credit. Get your debts paid off. Make all of your payments on time. Once you have a credit score at least in the mid-500’s or higher, you can apply for a first-time home buyer loan.
News: According to David M. Blitzer, chairman of the Index Committee at S&P Dow Jones, “home price increases appear to be unstoppable.” Housing costs are rising much faster than overall inflation or wages. This is giving Realtors and first time home buyers more confidence and the low interest rates being advertised make the housing market even more appealing. The National Association of Realtors released a new survey that revealed some interesting facts. Married couples remain the largest group of home buyers at 65%, Single women are now second-largest group of first time home buyers, accounting for 18% of housing transactions. Single men made up 7% of home buying this year. Home Prices Soar Even as Sales Dip
References: Advice for First Time Buyers with Poor Credit. (n.d.). Retrieved from https://www.quickenloans.com/blog/advice-first-time-home-buyers-poor-credit