Can I Buy a Home With Bad Credit? The Answer May Surprise You!
If you’ve ever considered buying a home, then the word “credit” probably has a distinct significance for you. Having a decent credit score is a must when you’re looking to buy a new home, but for the uninitiated, what credit score is needed to buy a house? Why do you even need good credit in order to purchase a home in the first place? We’ll be taking an in-depth look at that question and many more in this article as well as providing more details about improving your credit if you’re interested in making a major lifetime investment like this one. If you’ve been wondering what credit score is needed to buy a house in 2017, then this is the article for you.
What is a “credit score” and why do I need one to buy a house?
Your credit score represents what kind of loans you qualify for, how much your interest rate will be, and if you qualify for a loan in the first place. It can also affect things like the deposit amount you’ll need to pay to secure things like utilities and financing options. Your credit score is a three digit representation of your creditworthiness as a buyer and any potential risk that a lender might take on by having you as a customer. Establishing credit can be challenging, but it’s even more difficult to repair a credit score that’s been impacted by things like defaulting on credit card payments, being late with certain payments, or having various types of bills be sent to collections. Your credit score represents the likelihood that you will be able to pay your bills. But what does a good credit score look like and how will it help you to buy a home?
The most common measurement for credit scoring is the FICO score, which is the type of score that’s considered by lenders when they’re in the market for a new home. FICO scores can range from 300, which is the lowest credit score you can have, to 850, which is the best credit score that a person can maintain. The higher your credit score, the more trustworthy you will appear to lenders.
There are three national credit bureaus that do all of the credit score reporting in the US. The three credit bureaus are Equifax, TransUnion and Experian. Each of these reporting agencies can have entirely different records from each other, though your score can vary depending on which bureau is reporting your score information to FICO.
What credit score is used to buy a house?
Originally developed by Fair, Isaac and Company, your credit score is calculated using a number of variables, including timely payments on existing debt, the amount of your credit you have and are currently using, the length of your credit history, the types of credit you’ve used, and any previous credit applications you might have submitted. This can include credit card applications, loan applications, and even just searching for new credit options. This score is how lenders build a profile of you as a loan or credit recipient, and it doesn’t take much to affect your score. If you’ve ever applied for a credit card or opened a line of credit with a bank or store that will be reflected in your credit score.
The credit score required to buy a home can depend on a variety of factors, including which lender you’re considering, your existing credit (if any), and even the type of loans you have available to you. FHA loans – or loans insured by the Federal Housing Administration – are a good option for those who are buying their first homes, but your credit score can make you or break you, in this instance. A decent credit score (580 or above) can be the difference between making a 3.5% down payment on a home and a 10% down payment. For FHA loans, the minimum credit score required to buy a home is 580. However, for loans that are backed by independent lenders, like Fannie Mae or Freddie Mac, for instance, a score of at least 680 is required.
For those who have a credit score that’s lower than recommended, this can have a tremendous impact on the type of loans that you can qualify for, as well as the amount of interest you’ll be looking at when paying back the loan. If you have a score that’s lower than 580, don’t despair: you can still purchase a home with a lower credit score, however you will be required to put down a larger down payment as a trade off in order to qualify for a loan.
Loans are available as fixed-rate or as a variable or adjustable-rate mortgage. Fixed-rate mortgages, as the name implies, feature a fixed interest rate that lasts for the lifetime of the mortgage. By contrast, adjustable-rate mortgages have interest rates that “float” or adjust based on trends in the market.
Adjustable-rate mortgages are appealing to home buyers due to their lower initial interest rates. However, adjustable-rate mortgages can also be more difficult to maintain as the interest rate can vary from month to month based on the index or interest rate that’s established by market forces. This means that with an adjustable-rate mortgage, your monthly payment can vary from month to month. Luckily, though, there are caps on how much your interest rate can increase from year to year. There are also lifetime limits on how much your interest rate can go up over the lifetime of the loan. In addition, there can also be a payment cap which limits how much the monthly payments can go up. This is slightly different from the other caps, as it’s based on the dollar amount of the monthly payment rather than the percentage of how much the rate can change.
Most mortgages will start off as fixed-rate or feature a fixed-rate period, however, with adjustable-rate mortgages, after the introductory rate period your interest rate can go up. This can lend an element of unpredictability to the loan, as your monthly payments are based on the current market trends. One of the most popular adjustable-rate mortgages is the 5/1, with the 5 indicating the number of years you’ll be able to enjoy a lower fixed rate, while the 1 represents how frequently the rate can change (ie. every year after that 5-year fixed rate period).
What credit score is needed to buy a mobile home?
Title I loans offered by FHA-approved lenders can be used to purchase or refinance a manufactured home, the lot you’ll be placing that manufactured home on, or both at the same time. When purchasing a mobile home, lenders will consider your income level as well as your current credit score, the size of the loan, and the size of your down payment. The average score to buy a mobile home in the US is 620, but very often, lenders will be happy to work with you and find the best lending option to suit your needs.
There are even some lenders who only finance mobile or manufactured homes, so if you’re in the market for a new mobile home, this would be a good place to start. However, one thing to consider is that many lenders including banks and mortgage companies will only consider granting a loan if the mobile/manufactured home is already registered with the city as a real, fixed property. It’s possible to purchase a mobile home with a credit score lower than 620, however you might also have to make a larger down payment as well as adhering to specific credit guidelines they have established.
If you have a poor credit rating, all is not lost. It’s possible to work with lenders and credit bureaus to repair your credit and improve your score enough to close the score gap. You would need to retrieve your credit records from all three reporting bureaus – Experian, Equifax and TransUnion – in order to get a better idea of what your current score is. Fortunately, you’re entitled to one full credit report each year, which you can obtain via a number of free credit reporting websites online. Examine your credit records and look for any records regarding outstanding debts or issues – including things like being late on credit card payments, missing payments entirely or defaulting on the balance on your card. From there, it’s just a matter of working with these banks, credit card companies or lenders and finding the best way to settle any debts you have to clear them off of the lender’s books and your credit score records.
Owning your own home is considered a key component of the American Dream, and armed with the information included here in this article, it’s a dream that can be attained. Whether you have excellent credit or no credit at all, it is entirely possible to improve your credit score and buy your first home.