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So, you’re ready to buy a home. You’ve done hours of research, sat through meetings with mortgage lenders and realtors, and you feel prepared to take the plunge.
Whether you’re a first-time buyer or an experienced homeowner, the process of buying a home can feel overwhelming.
If you’re not careful, one detail can and will derail your dream of homeownership before you’ve even left the mortgage lender’s office.
That detail is your credit score. The little number has a lot of influence in the home loan world—enough to make securing a mortgage with bad credit seem nearly impossible.
Still, if you’re hoping to buy a house with bad credit, there are options to help you get there. So, keep reading as we explain the home buying process with a low credit score, and some steps you can take to improve your credit score.
You probably know that a credit score can range from 300 on the low end to 850 at the highest. But what you might not know is how your score is placed on this spectrum.
Credit scores are tracked by three main credit bureaus: Experian, Equifax, and Transunion.
Your credit score can differ between these three bureaus. So, if you want to apply for a loan, you’ll want to check all three, because the bank will do the same.
There are two main models of credit scoring: one developed by FICO and the other by VantageScore.
If you’re like most Americans, your score is probably between 600-750.
Let’s say your credit score is around 620—the minimum score for most home loans. You’re in decent shape, right?
It depends. If your lender is using FICO, you’ll fall into the ‘fair’ credit score range.
But if your lender uses VantageScore, you're sitting right on the edge between ‘fair’ and ‘poor.’
Because your score is the main factor in your loan determination you’ll want to verify which model the bank is using. The difference could mean thousands more (or less) on your loan payment.
Be sure to check for any errors in your credit score too—generally, the bureaus won’t receive the same information about your credit history.
If your credit score is in the 300-550 range, you might assume you have poor or bad credit.
While this makes sense in terms of your FICO or VantageScore determination, you’re not getting the full story.
The trouble is, your lender decides what a bad credit score is. And the loan they offer you will depend on several other factors:
•How much cash you have for a down payment
•Your overall amount of outstanding debt
•Your income
•Any debts you have in collections
These factors will vary by lender, so if you have a low credit score be sure to do some research before making a final decision.
We get it—improving your credit score isn’t the solution you want to hear, and it probably won’t be easy.
Still, improving your score just slightly could save you thousands in the long run. Here’s a short list of steps you can take to improve your score:
Stay on top of your Payment History: Payment history accounts for 35% of your credit score, so you need to be sure that any debts you still have are paid off on time.
Another method is to charge all of your debts to a credit card. Provided you can pay the balance each month, the payment history from this method can help improve your credit score.
Reduce your Credit Utilization
After payment history, your credit utilization is the second most important factor in your credit score. It takes your credit limit and credit balances into account.
So, let’s say your credit limit is $15,000. If you’ve spent $7,500 your credit utilization will be 50%.
Ideally, your credit utilization percentage will be below 30%. If you want to give yourself more room, you can ask your bank for a limit increase to reduce your percentage. This process typically takes just a few minutes.
From there, you can work on shaving that number down to 10%—the ideal percentage for improving your credit score.
Debt Collections and Deletions
Remember the importance of your payment history?
Debts that are in collections can have a serious impact on your credit score, along with losing cash on repossessed items.
Still, if you’re in this type of situation you have rights that the debt collector must respect; start by understanding what the repossession company can and can’t do.
Unfortunately, even after you’ve paid back your debts, collections history can stay on your credit report for up to 10 years.
In this case, you may want to consider paying for a deletion, which will remove the outstanding debt from your payment history.
This method is a last resort, and if you have multiple debts, it may not improve your credit score. Still, paying for deletions gives the bank less reason to deny your loan application.
Consolidate your Debts
Do you have a number of outstanding debts? If so, you might want to consider consolidating your debt into a single loan payment.
Depending on your financial situation, a debt consolidation loan can help you pay off your debts in one payment, and in less time.
But beware! Banks will often charge high-interest rates for this type of loan along with extended loan terms, meaning you’ll pay more over time.
Debt consolidation loans can help improve your credit score, but the bank won’t make things easy. That’s why United Financial Freedom developed a better way to consolidate your debts (more on this later!).
If you’ve done everything you can to improve your credit score and you’re still on the hunt for a new home, there are some steps you can take to secure a good mortgage.
Do your Research
Shopping around for lenders isn’t fun, but waiting for the right lender could mean a lower interest rate.
A difference of 0.5% could have a huge impact on how much you pay the bank during your loan term. For more on how your mortgage interest rate is calculated and what it means for your wallet, click below...
Look into Bad Credit Loan Options
Federal Housing Assistance (FHA) loans offer rates as low as 3.5%, even with bad credit.
If you’re a veteran, VA loans offer zero down with low-interest rates. USDA loans are another great option, with similar benefits to VA loans.
Shell out on your Down Payment
If you have bad credit, cash could be your best friend when it comes to getting a loan from the bank.
While a lender might turn you down for a low credit score, if you’re able to produce a larger down payment you may have a better chance of securing a loan.
The truth is, when you’re looking for a loan with bad credit the bank doesn’t have your best interests in mind.
Lenders aren’t considering you and the people you have to provide for.
They’re out to make cash on your loan, and they’ll only be looking at the numbers behind your name—your credit score and financial track record.
So, with a bad credit score your options are limited…When it comes to your average lender.
Like we mentioned earlier, there is! And it can help you pay off your debts in less time without the hassle of going to a lender.
It’s a financial tool made for everyday people by design, because it wasn’t made by any greedy bank or lender.
It’s called the Money Max Account, and it’s the result of everyday guys working together to fight the thing they hate just as much as you do: debt.
Created by United Financial Freedom founders Skyler Witman and John Washenko, the Money Max Account can help you save time and money on your debt payments.
Think back to the importance of your payment history. Paying off debt on time means a better credit score, and less time paying off debts (with interest) means more money in your pocket.
And the Money Max Account is designed to help you pay off your debts in record time! It can even help you pay off up to a 30 year mortgage in as little as 7-10 years!
Don’t waste another day tracking every expense or creating budgets to pay off your debts. Let Money Max do it for you!
It’s a comprehensive account that can help you consolidate debts, track your expenses, debt payments, and other factors that make up your credit score.
Why spend decades saving up cash or raising your credit score for a high interest loan that’ll cost you thousands anyway?
With Money Max, you can spend less time paying off your debts, and more time looking for your new home.
For more information on the history of United Financial Freedom and why we created the Money Max Account, visit our homepage.
Want to learn more about what Money Max can do for you? Our representatives are standing by to answer your questions.