Most people buying a home will need to get a mortgage, and as an article in realtor.com points out, lenders prefer borrowers who have already shown they pay off debt. As a result, lenders check credit scores which show how well someone has handled financial obligations in the past, such as credit cards and college loans.
People with good credit scores should find it reasonably easy to get a good deal on a mortgage, but people with bad credit scores may find it trickier. This doesn’t mean it’s impossible, and the article highlights several ways to get a mortgage with a low credit score.
The first thing they recommend is checking your credit score before you meet with a mortgage lender. If the score is 740 or more then you’re in a good position for getting a great deal on interest rates and can take advantage of more attractive mortgage terms. A credit score below 700 could lead to lenders questioning whether you are a good risk.
If your credit score is on the lower side, the next thing to do is to check if it is correct. Apparently, creditors often make mistakes and around 25% of Americans find errors in their credit reports. If you made a mistake on a payment, it’s worth asking if it can be removed if it only happened once. If your poor credit rating is due to a history of late payments, however, it’s a very different matter. In this case, it’s simply a question of making sure payments are made before or on their due date. Eventually, this will result in your credit score increasing.
Even if your credit score isn’t perfect, you may still qualify for a normal mortgage loan, just at a slightly higher interest rate. As interest rates are historically low, it could make sense to take the hit on a higher rate to purchase a property now. In the end, it may not make much difference to the overall amount repaid.
Another option is to get a Federal Housing Administration loan. To qualify borrowers need a minimum 580 credit score, but this does mean down payments can be as little as 3.5%. The main drawback about getting an FHA loan is the mortgage insurance premium which is around 1.75% of the loan amount.
Making a larger down payment on a home loan could also help save a poor credit score. In this case, some mortgage lenders might be willing to approve a home loan, as the larger the down payment, the lower their risk. A larger down payment helps strengthen a mortgage application, although a lower credit score may still result in a higher rate of interest.