Category Archives: Buy a Home

Can I Buy a House with Bad Credit ?

Meet the three-digit number that can drastically affect your ability to buy a home.

Turns out, Americans aren’t the best at money management. The average U.S. household has over $15,000 in credit card debt. Another eye-opening survey revealed that one out of every four respondents had less than $100 in savings to cover an emergency. Consequently, people are relying on credit cards to fund their expenses. All of this spells trouble from a home-buying perspective.

Your credit score is one of the crucial determining factors in whether you can qualify for a mortgage. Lenders use it to gauge your financial responsibility: The higher your credit score, the less risky you appear on paper, says Staci Titsworth, a regional manager at PNC Mortgage in Pittsburgh, PA.

Unfortunately, a lot of misconceptions surround credit scores. Here are answers to some of the most common questions prospective homebuyers have.

What affects my credit score?

Most mortgage lenders check your credit score, which is calculated based on the information that appears on your credit report. Five aspects impact your score, each varying in importance: payment history (35%), debt-to-credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%). A quick primer:

  • Payment history. This one’s fairly straightforward: You need to make payments on time, since one late payment can significantly ding your score. Indeed, a 30-day delinquency can cause as much as a 90- to 110-point drop on a score of 780 for a consumer who has never missed a payment before, according to Equifax.
  • Debt-to-credit utilization ratio. This is how much debt you’ve accumulated on your credit cards divided by the credit limit on the sum of your accounts. Credit experts recommend keeping this ratio around 30%. That means if you’re maxing out your credit cards each month, you could be damaging your credit score in the process.
  • Length of credit history. Having a longer credit history raises your score. Since credit agencies look at the age of your oldest account, the age of your newest account, and the average age of all your accounts, you should keep all your accounts open — even those with zero balances, says credit expert Bill Hardekopf.
  • Credit mix. It helps your score to have a combination of different types of credit accounts, including credit cards, retail accounts, installment loans, car loans, and mortgage loans. (You’re on your way to getting the last one.)
  • New credit. Each time you apply for a new credit account, you trigger a “hard inquiry” on your credit, which dings your score (typically by five points). Therefore, avoid opening multiple credit accounts at the same time, advises Hardekopf, since doing so will lower the average age of your credit accounts and hurt the length of your credit history.

What’s an ideal credit score?

A perfect credit score is 850, but only about 0.5% of consumers reach that number, according to Fair Isaac Corporation, creator of the widely used FICO credit scores. Once you’re over 740, you’re considered to be in the best range for mortgages and should be able to qualify for the best interest rates, says Chris Hauber, a mortgage loan originator with Hallmark Home Mortgage in Denver, CO. Granted, if your score is in the 700s, you should still be able to qualify for an attractive interest rate.

For conventional loans, most lenders look for a credit score of at least 620, says Hauber. At a minimum, applicants should have at least a 660 credit score to land a decent interest rate and avoid jumping through additional hoops to qualify for a loan.

Can I get a mortgage if I don’t have a credit history?

Hopefully, you opened a credit card by the time you reached age 20 — or at least started building credit by becoming an authorized user on your parents’ card when you were a teenager. (Remember, the length of your credit history plays a major role in how your score is calculated.) But if you don’t have any credit established, there are still ways to qualify for a mortgage.

“If someone doesn’t have any credit, we will try to establish credit history using alternative sources,” says Titsworth, adding that many lenders will look at monthly payment obligations that don’t necessarily show up on a person’s credit report. Have a good track record of making your car loan payments and paying rent on time? “Those habits are usually indicative of a responsible credit user,” says Titsworth.

Is bad credit worse than no credit?

No one’s perfect; mistakes happen. Maybe you forgot to pay the minimum balance on your credit card bill once or twice — or you recently met with a mortgage lender to discuss your financing options and discovered errors on your credit report. Whatever the case may be, you can always take steps to heal your credit. “Poor credit can be managed,” Titsworth points out.

Moreover, there are loan programs designed to help people with mediocre credit buy a home. Federal Housing Administration (FHA) loans have some of the lowest credit-score requirements at 580 with a 3.5% down payment. Loans backed by the Department of Veterans Affairs let military veterans put as little as 0% down on a property without having to pay private mortgage insurance.

How can I boost my credit score before I buy a home?

To get your three-digit number up to snuff, start by addressing the financial habits that damaged your score in the first place. This usually means simply paying all your bills on time each month, which is the easiest way to boost your score, says Hardekopf. If you need help adjusting your spending habits and designing a budget that makes sense for you, consider meeting with a financial planner (you can find one at NAPFA.org).

Since credit scores are often the result of having a high debt-to-credit utilization ratio, one of the best ways to improve your score is to pay down your credit card debt, says Hauber. Many experts use the 30% rule of thumb: Charges to your credit cards shouldn’t exceed one-third of your total available credit limit. You may also be able to raise your score by requesting a credit line increase from your credit card issuer; this would effectively reduce your debt-to-credit utilization ratio. It typically involves just making a phone call or submitting a request online.

Another way to mend your score is by fixing errors on your credit reports. You’re entitled to a free copy of your credit report every 12 months from each of the three major credit-reporting agencies (Equifax, TransUnion, and Experian). One in four Americans said they spotted errors on their reports, according to a 2013 Federal Trade Commission survey. The mistake may be something as simple as someone else sharing the same name as you and your bank mixing up your accounts, says Sylvia Gutierrez, a loan officer in South Florida and author of Mortgage Matters: Demystifying the Loan Approval Maze.

Caveat: Your credit report doesn’t contain your actual credit score. However, your credit card company can most likely provide your score to you for free, or you can contact a nonprofit credit counselor to find out your score.

What if I notice errors on my credit report?

If you spot an error, alert your creditor immediately. Once your creditor confirms the error, the company will submit a letter to Equifax, TransUnion, and Experian individually to get the error removed. If the error is just on one bureau’s report (like a misspelled last name), contact that agency specifically to rectify the problem. Hopefully, you spotted it early in the home-buying process, since “it can take time to get errors removed from your report,” says Titsworth. If you’re already in the process of purchasing a home, ask your loan officer to help you speed up the error removal.

Can I get black marks removed from my report?

If you’re the one responsible for blemishes on your report, such as a missed payment, contact your creditor and ask for a deletion. While this likely won’t work for a serial late payer, it might be granted if you’re a one-time offender; it also helps if you’ve been a loyal customer. If the creditor agrees to the deletion, they’ll send letters to the credit bureaus (the same way they do for errors) requesting that the negative information be removed from your report. Then the onus is on you to gather documents that show your loan officer changes have been made — such as a new credit card statement or letter of deletion — and have your lender request an updated score from the credit bureaus. This process is often referred to as a “rapid rescore” and can lead to an updated credit score in days instead of months, which can make all the difference when you’re trying to get preapproved for a home loan in a competitive market.

Should I get help from a credit-counseling agency?

First, you need to understand the difference between a credit-counseling agency and a debt-management company. If you’ve fallen behind on credit card payments, a credit counselor can help you create a plan to pay back your creditors and better manage your money for a relatively low cost. A debt-management company, meanwhile, will negotiate with your creditors to try to reduce the amount of debt you owe — but many debt-management companies charge a large fee for their services.

Unless you’re seriously in the hole, a debt-management company probably isn’t the way to go. Whether you should meet with a credit counselor, meanwhile, depends on how complicated your financial situation is and what kind of guidance you want. If you have debt on only one credit card and simply have to pay off the balance, you already know what you have to do to mend your credit score. If the situation is more complicated (e.g., you owe money on several credit accounts and don’t know which to pay off first), a session with a credit counselor may help you devise a payoff plan. Some nonprofits, like the Consumer Credit Counseling Service, offer free consultations.

 

https://www.trulia.com/blog/how-to-get-a-loan-with-bad-credit/