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.

What Is Loan Consolidation

Loan consolidation is the process of combining debt from multiple (high interest) sources into one low interest debt source.  This could mean combining all your credit card and other debts into a personal or home equity loan or combining all your credit card debt onto one low interest credit card.

Secured and Unsecured Debt Consolidation

• Unsecured debt consolidation loan

These are very common types of debt consolidation loans.  What an unsecured debt consolidation loan essentially means is that you do not need to have collateral in order to obtain the loan.  So if you do not honor your debt obligations, you won’t lose your properties and belongings.  But what will happen is that your account will go to collections and your credit score will plummet.  A typical unsecured debt consolidation loan is using a personal loan to consolidate your credit card debt.

• Secured debt consolidation loans

Secured debt consolidation loans are loans in which the bank is required to put a lien on your property (such as your car or house) in order to cover potential losses if you do not repay.  Personal loans sometimes require collateral and are a great option if you are looking for a loan to consolidate small debt.  It is often used for as a loan for consolidating your credit card debt.  But for larger debt (more than $10,000) most people opt to do a mortgage refinance or a home equity loan/line of credit.

Sources For Loan Consolidation

There are various ways to consolidate your debt and the best choice for you will depend upon your current financial situation and how much debt you have.  We will outline a few ways to consolidate debt below:

Personal Loans and Social Lending

For consolidating small credit card debt, you may want to consider a personal loan.  The personal loan traditionally has come from large banks and credit unions.  However, the internet has given rise to a new form of personal loans—social lending.

Social lending is a form of unsecured personal loan.  However, instead of getting the loan from a lending institution, you are getting it from an individual who wants to loan you their money in return for gains earned from interest.  So yes, you will have to pay interest on any loans borrowed from social lending sites.  However, the rates are often a lot more favorable than personal loans through banks. LendingClub.com, a social lending site, touts that their interest rates for personal loans start at just 6.78% for a person with excellent credit.  The rates at Prosper.com (another top social lending site) start at 7.4%.  Overall, the loan rate for debt consolidation from social lending sites is almost always going to be lower than the rate that a bank will charge you for a personal loan.  However, to be sure, you should apply to both a bank and a social lender.

Balance Transfers

Another source for credit card debt consolidation is obtaining 0% interest credit cards for a balance transfer.  A balance transfer is a way for you to move your high interest credit card balance onto a card with lower interest.  Many credit card issuers offer 0% interest rate on balance transfers.   You should be careful though as the 0% interest only lasts for a fixed amount of time, usually a year, your interest rate hikes to the standard rate.  Use that 0% interest to your advantage and pay off your balance before the interest rate resets to the card’s standard rate.  

As a caveat, balance transfer always have a fee attached to the balance transfer so you should always find out how much the fee is to transfer your balance.  For instance the balance transfer fee of Citibank is 3% of the balance transfer.  Many other banks charge the same amount for a balance transfer.

The Dangers of Loan Consolidation

Loan consolidation can be your savior if done right.  But if done wrong, it can lead you to further financial ruins.  The danger in debt consolidation comes in when people don’t use it as a tool to work down their debt but instead pile on more debt.  A perfect example of this is when someone gets a personal loan to pay off their credit cards but then they end up using their credit cards again just weeks later.  So now that person is having to pay for both the personal loan and any new credit card debt a person accrues.  This is a pitfall in loan consolidation; just because you paid off your old debt doesn’t mean you are free.  The loan consolidation process just gives you lower payments and a longer timeline to pay off your debt.

Is Debt Consolidation Right For You?

Debt consolidation is not always the right way to go.  It has to always depend on the terms and your current living situation.  For instance, if you owe $10,000 of debt at 9.99% interest—is it really worth it to get a personal loan that gives you 5 years to pay off the $10,000 but at an interest rate of 19.99%?  In the end getting out of debt is all about having the right debt management plan and sticking to it.

If you want to find out if a debt consolidation is right for you, use this wonderful debt consolidation calculator made by Bankrate.com.

How Do Credit Card Payments Work?  The Credit Card Billing Cycle 

How do credit card payments work?  A billing cycle typically ranges between 29 to 31 days.  A credit card company then usually gives you a interest-free window (called the billing cycle) to pay back the amount you spent on the credit card.  However, if you do not pay off your whole credit card balance by the end of the billing cycle, you are then charged interest on the remaining balance on the next billing cycle from the previous billing cycle.  This is where people fall into the trap of credit cards.  They spend freely but do not have enough discipline to pay back the whole balance by the end of the billing cycle.  The interest then adds up the longer you have a balance on the credit card.

Minimum Payments On Your Credit Card

You are typically only required to make a minimum payment on your credit card each billing cycle.  The minimum payment is the sum of the interest charges, fees, and 1% pay down of the outstanding balance.  So typically, it is anywhere from 3% to 5% depending on your balance and the interest rate associated with it.  If you pay less than the minimum payment required, you are considered late and credit card companies may charge you a late fee.  However, with the new credit card laws, the late fees are very easy to get rid of.

NOTE: Charge cards such as American Express require you to pay off your whole balance and not a minimum payment.

Credit Card Annual Fees

Most typical credit cards do not have annual fees.  However, for those who want reward cards (such as Alaska Airlines mileage card) or have bad credit, you will have to pay annual fees.  Annual fees for reward cards are usually waived the first year as a sign up incentive.

How Does Interest Rate Work On Credit Cards

Interest rates on credit cards is compounded annually.  When you sign up for a credit card, the interest rate is charged as APR (or annual percentage rate).  So if your credit card has a 12% interest, then you are charged 1% interest every month on the balance remaining on your credit card.  So if you had $100 balance on your credit card after the billing cycle, then you are charged $1 interest on that balance on your credit card.  That interest then compounds onto next month if it is not paid off.  Because of the compound interest on your credit card balance, it is extremely important that you pay more than the minimum payment every month.  Or else, it will take you quite awhile to pay off your card.

A credit card can be a powerful tool with plenty of perks if used properly.  However, not very many people use credit cards with caution and be able to reap the benefits of such.  If you can manage your finances and keep the interest charged to a minimum, a credit card can be a very powerful asset for you.  If not, it can be very unhealthy to your personal finances.

HARP (Home Affordability Refinance Program)

• Deadline is June 30, 2011 for HARP 1.0 and December 31, 2013 for HARP 2.0
• If your loan is owned by Fannie Mae or Freddie  Mac, you qualify.  Check to see if your home is owned by Freddie Mac or Fannie Mae by typing in your address in the link.
• Allows a loan-to-value ratio of up to 125% of your new home loan
• People who have ARMs that just re-adjusted or will re-adjust shortly can apply
• If you get to refinance, there will be no mortgage insurance
• You need to be current on your payments to be able to be eligible
• Do not need a documented hardship

HAMP (Home Affordability Modification Program)

• It must be for your primary residence
• HAMP is a program that modifies your existing mortgage instead of refinancing (what HARP does)
• Your mortgage must be equal to or less than $729,750
• Your mortgage was signed before January 1, 2009
• Deadline to apply is December 31, 2013
• Your current payments (including taxes, interest, insurance, and homeowner dues) exceed 31% of your total gross income.
• Have a hardship that can be documented by paperwork (a list of acceptable documented hardships for loan modification)
• Your must have verifiable income that is enough to pay for the new payments (and cannot exceed 31% of your gross income)

1) See if you qualify for a HAMP (Home Affordability Modification Program) by going here.  Basically, HAMP is for mortgages originated on or prior to January 1, 2009.  The program is set to expire on December 31. 2013.  Here is a list of reasons why a bank might consider modifying your loan:

• Illness
• Loss of Job
• Failed Business
• Job Relocation
• Death of Spouse or C0-BorrowerDeath
• Incarceration
• Divorce
• Marital Separation
• Military Duty
• Reduced Income
• Medical Bills
• Natural or Unnatural Disasters

I am not saying they will modify your loan if you are in one of the situations above.  All I’m saying is that they will consider it.

2) Escalate your claim to the highest level possible.  For a list of who to contact, go to this page for home modification contacts.  Although it might be fruitful in the end, you are wasting a lot of time calling customer service.  You will be bounced back and forth between different customer service representatives to no avail.

3) If you do not fit within HAMP guidelines because of income, get someone in your household or a next of kin to write a letter of support for you, stating that they will contribute X amount to your monthly mortgage payment.  It might work with some  banks, other banks it might not.  Banks under the HAMP program can only reduce the interest rate down to 2% and spread out your payments to 40 years.  If you do the quick math and find that even with a 2% 40 year mortgage, you still cannot meet the 31% gross income threshold set out by HAMP, then it means you need financial help from people close to you.

Gather all financial documents.  This includes recent pay stubs, tax returns from last two years, 1099s, and any other pertinent information that you want to share with the bank or that the bank might ask for.  If you are sick, get a note from the doctor.  If you lost your job, get a letter from your former employer.

4) Write a letter of hardship.  All banks will ask you to describe your circumstance.  Don’t be melodramatic but write to be concise and use rhetoric that induces sympathy.  The people modifying your loans are human after all, with human emotion.  If your hardship letter can induce sympathy, you are more likely to get your loan modified.

5) Try to negotiate with the modifier.  I know you are angry, frustrated, and sad.  But when you are engaging in a conversation with the bank, try not to take it out on the loan modifier.  If you are nice, they are more likely to champion for you.  They are there to help you.  So help them help you.

6) Wait.  Even taking all these steps is not a guarantee in getting your loan modified.  However, this is a good guideline for your to start.  I wish you the best of luck!

More will come soon as I dig up more.

Bank of America e-mail CEO  Brian Moynihan at brian.t.moynihan@bankofamerica.com or call 1-800-846-2222

BB&T Mortgage 1-800-827-3722

AmTrust Bank 1-888-696-4444

Beneficial 1-888-333-5848

Central Pacific Bank 1-800-342-8422

Charter One 1-888-234-6002

Chase Home Modification 1-866-550-5705

Citi Financial Mortgage 1-800-915-9417 Opt. 4 or email homeownerhelp@citi.com

Ditech 1-800-852-0656

Everbank 1-800-669-7724 ext. 4730

Equity One (Debt collection) 1-800-61-3460

First Horizon Home Loans 1-800-489-2966*

Fifth Third Bank 1-800-375-1745 Option 3

First Merit Bank 1-888-728-9931

Flagstar Bank 1-800-968-7700, ext. 9780

Fremont Investment & Loan 1-866-484-0291

GMAC Mortgage 1-800-850-4622

GreenPoint Mortgage Funding 1-800-784-5566, ext.
5383*

Green Tree 1-877-816-9125

Household Finance (A HSBC Co.) 1-800-333-5848

Option 1 Mortgage (American Home Mortgage) Jim Davis (Exec VP) e-mail jim.davis@ahmsi3.com