The Definitive Guide to Buy a House With Bad Credit
There are a lot more steps involved in getting a good home mortgage than merely applying for a home loan. Knowing your credit score, fixing problems on your credit report and research are crucial to getting the best loan - especially when you currently are dealing with a bad credit score.
Knowing What Your Credit Score Means
A credit score is a number that ranges between 300 - 850 and is a number your lenders will use to determine whether or not they feel you will repay your loan if they offer you one. Generally, a person with a credit score of 700 or above has good credit and can qualify for most conventional type loans. Fair credit is usually determined to be anything from 650 - 699, poor credit is anything from 600-649, and bad credit generally means anything below 600. Knowing what your credit score means can help you see what category you fit in and help you identify the best type of loan options that will be available to you.
Get a Copy of Your Credit Report
It's important to get a copy of your credit report before you apply for a loan. A credit report is a compilation of information about your history of handling your debt. The report includes an account of how much debt you currently have or have accumulated in the past and how well you pay your bills. It also shows if you've filed for things such as bankruptcy, tax liens or foreclosures. Others items of note are whether you have debts in collections, had a vehicle repossessed or have been part of any lawsuits.
Every twelve months you are entitled to a free copy of your credit report. Credit reports are very detailed and in the United States are maintained by three major credit bureaus: Equifax, Experian, and TransUnion. Sometimes companies will update your credit information monthly, such as most credit cards or loan accounts. Other businesses might not show up on your credit reports unless you stop making payments and the bill turns into debt.
Fix Errors and Reach Out to Creditors
Take time to search through your credit report and fix any errors you may find. Correcting mistakes not only helps boost your credit score but can help you look more favorable when someone looks at your credit history. A lot of businesses check your credit report when they make decisions about you, whether that be lenders or potential employers. Your credit report can affect a lot of different areas of your life, not just loan applications, so it is essential that all the information listed is correct.
It is a good idea to fix any negative portions of the credit report that don't favor your credit score. Reach out to your creditors and see if there are any solutions you can agree on for them to remove the negative blemish from your credit report. Some creditors will allow you to pay a settlement amount and they will remove the bad mark. Other creditors may be willing to work with you in eliminating collection items if you reach out to them with a goodwill adjustment letter. It never hurts to try. Fixing errors and reaching out to creditors in a polite, professional way can boost your credit score and help you achieve your dream of homeownership that much sooner.
Explore Loan Options And Start Saving
After you know your credit score and improve it as much as you can, research what home loan options are available to you. Federal Housing Administration (FHA) loans are a popular solution for many borrowers who have lower credit scores because they require a lower down payment and lower credit score qualifications. Other loans, such as VA home loans and Rural USDA home loans, have other appealing options as well. Depending on credit score, there may be other good options available too.
Once you know the type of loan you would like to use for your mortgage, make sure you have the right amount saved for a down payment on the home. FHA home loans only require a minimum 3.5% down payment amount, while other loans require 10%. Explore the loan options available to you, look at the qualifications necessary for those loans and take time to choose the right type of loan for you.