One of the largest barriers for many when buying a home is their credit score. While credit was initially designed to help the average consumer, the majority of individuals have what is considered poor credit. If you are one of the many that fall into this category, you are probably searching the internet for a way out of the renting rut that you are stuck in. Usually, because you don't have good enough credit to buy. Or do you?
In the last few years, lenders have lowered their standards for credit scores to allow more people the opportunity to purchase a house. Before we dive into the options available for those looking to buy a house, let's take a look where your credit score lies.
What is considered “good” credit?
Credit scores range from no credit to perfect credit. A perfect credit score is 850. If you are within 750 and above, your credit is considered excellent, and you shouldn't have any problem getting a loan, credit-wise.
Good credit is in the 700-749 range. Loan options should still be fairly open to you in this range, although you may need to add incentives for them to lend to you. A great incentive is a more substantial down payment.
If your credit falls in the 650-699 range, it is considered to be fair. While there are still loan options available to you in this range you will have to jump through more hoops for the lender to consider you.
The 550-649 range is considered to be poor, and this is actually where the majority of people in the U.S. reside. This is a stickier range and is where you begin to scrape the bottom of the barrel in terms of getting a loan for your house.
Anything below 550 is considered bad credit. If you don't have any credit, you also reside in this area. Loan options for those in this range come more from unconventional means than your typical house loan.
If you want to know your credit score, there are several credit apps that will give you that information without dinging your credit. Some of them do charge fees, though, so be on the lookout for those.
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Low Credit Score Options
Now that you know how to find your credit score, and where it lies on the spectrum, let's dive into the loan options available to you.
FHA Loans are loans given through FHA approved lenders. This loan is backed by the government and is for first-time homebuyers primarily. The lowest credit score you can have for an FHA loan is 580. This may seem like a lovely option to jump on, especially since they accept down payments as low as 3.5%. Be aware, however, that they do want insurance since taking on individuals with lower credit is considered risky. The lower the down payment and credit score, the higher the insurance premium rises. To understand all of your rates and fees, make sure you talk to a qualified lender (of which we are not).
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Conventional loans go through Freddie Mac or Fannie Mae lenders. The Federal Government does not back these loans, and anyone can apply. They boast lower down payments than FHA loans, but only accept credit as low as 620. As with most loans, the lower your credit score, the higher the fees attached to the loan. If you put a down payment of less than 20%, the lender will require you to get mortgage insurance.
VA Loans require a credit score minimum of 620. This loan is great for those serving in the military as well as their spouses. If your credit qualifies, you may not be required to put a down payment on the house, although the fees will be wrapped up into the loan amount. As with the previous loans, the lower the credit score, the higher the scrutiny. Jumping through hoops will be a necessity if your credit score scrapes 620.
Lease To Own
This is the option for those who do not have great credit at all but need a house. Lease to own options involve you putting down some money for the option to buy the house, and your rent each month goes toward that amount. Most lenders include interest in the equation, and leasing to own is no exception. Because the seller is taking on a huge risk when they accept you as the lessee, you can expect to jump through some pretty big hoops here as well. If all goes well and you stay up with your payments and are able to afford the house at the end of the set time period, you will have a house in no time!
Tips to Raise Your Credit Score
Not finding an option you like in the above loans? You could always try raising your credit score! If you have taken out bankruptcy in the last few years, there is not much you can do but wait and remain current on your payments as they stand. If you have some outstanding bills, make sure to pay them off. Check your credit statement to identify the reason for your lower credit score. If you find any bills that are still reporting as overdue even after you've paid them, you can write a letter to the reporter and point out the error. You can often get things like that removed from your credit report altogether.
If you don't have any credit, or just need to raise your credit score without any late payments recording, it is a good idea to use the credit cards you have. As you use them, pay them off immediately. This will begin reporting a positive number toward your score and will work to raise it.
To avoid the hassle of hoop-jumping and fees, work to repair your credit score before you apply for a home loan. There are many financial advisors that can help you with that. When you are ready to buy, make sure you find a quality real estate agent that can help you find the home that fits your loan.
Looking for a quality agent is easy through Clever. Clever only uses the top reviewed agents in your area, and the best news is that each of their agents are discount agents. This means that they'll give you all the service for a great flat rate. If you're purchasing a house, you may even qualify for a commission rebate of up to 1% of the purchase price! How's that for Clever?