Weak Credit – How to Buy a Home Anyway
According to Value Penguin, the typical credit score of a homebuyer is 728, which is slightly higher than the national average of 695. Just 6.8% of homebuyers had scores below 620, of over 85,000 mortgage applicants surveyed by the Federal Reserve, the site reports.
If you don’t know what your credit score is, the first thing you need to do before looking into buying a house is to check your FICO credit score. There are many places online where you can do this for free, such as Credit Karma. You need to know what your three credit scores are, one from each credit bureau: TransUnion, Experian and Equifax. Of your three scores, mortgage lenders will use the middle, throwing out the highest and lowest.
If your credit score is weak, or below the average, how can you buy a home, whether it’s in Phoenix, San Diego, Atlanta or anywhere else?
Look at Homes You Can Realistically Afford
No matter what your credit score, if you only make $40,000 a year, you’re not going to get a loan on a million-dollar home. Lenders are also going to look at your income to ensure that you’ll be able to pay back the money that you borrow. As a general rule, the total cost of your mortgage payment, insurance and property taxes shouldn’t exceed more than 28% of your pre-tax income – and, your combined monthly payments that include all outstanding debt should not be more than 36% of your pre-tax income. If you stay within that range, you’ll have a better chance of getting approved for a mortgage.
Check with Multiple Lenders
Just like you would with any major purchase, it’s important to shop around. Each lender has its own set of credit requirements – while not all of them are open to working with those who have weak credit, by contacting multiple lenders you may be able to find one willing to work with you. The definition of poor credit is arbitrary, with some lenders considering scores of under 650 to be bad, and others at 630. The key is you’ll need to submit applications within a relatively short period, with most credit scoring models counting all inquiries taking place over 45 days as one inquiry so that shopping around won’t hurt your score as much as each application will trigger a hard inquiry.
Look at FHA Loans
FHA loans typically have looser credit requirements – it may be possible to get one with a credit score as low as 500, although a 10% down payment is required for scores of under 580. While mortgage lenders may cover closing costs, you’ll usually have to pay a higher interest rate over the life of the mortgage, as well as private mortgage insurance (PMI), if you put down less than 20%.
The Larger the Down Payment, the Better
The larger down payment you can make the better the odds of approval as it reduces the risk to lenders by lowering the amount you’ll need to borrow. While 20% is ideal, putting down as much as you can comfortably afford shows lenders that you’re committed to the home and making a significant investment.
