Your credit score is one of the key factors that mortgage lenders consider when you’re applying for a home loan. But if you find yourself on the lower end of the credit score spectrum, don’t worry – homeownership could still be a reality for you.
With rent on the rise and home values increasing, 2017 is a great year to buy a home. So don’t let poor credit keep you out of the market. Here are some tips for approaching the mortgage process if your credit score is lower than you’d like it to be.
Know What Score You Need
Your credit score affects whether you can get approved for a mortgage as well as what your interest rate will be. Higher credit scores will generally give you more mortgage options. At Quicken Loans, a credit score of 660 or higher will give you a wide range of options.
If you’re interested in a conventional loan, you’ll need a minimum credit score of 620. However, you can qualify for an FHA loan with a score as low as 580.
Discuss Credit Issues with Your Mortgage Lender
Talk to your mortgage lender about your credit score. Perhaps your credit score is a result of identity theft or previous challenges that no longer affect your financial stability. Be sure to have your payment records and other documentation beside you to help verify your case for a home loan.
Get Credit Errors Fixed
Carefully review your credit report to ensure its accuracy. Keep in mind that the balances shown may be slightly off due to recent payments that have not yet been recorded. If you do find an error in your report, you can send a written dispute letter to get it fixed. This is worth the effort as it could raise your credit score and open up more loan options to you.
Review These Options for Buyers with Poor Credit
Make a Larger Down Payment
You may have the option to compensate for your low score by putting more money down. This makes you less risky to your lender as you’ll have more invested in the home and be less likely to walk away from it.
If you don’t have the cash for a large down payment on hand, look for assets that you can liquidate without taking large losses. For example, your retirement account could be a source of cash for your down payment.
Another way to fund your down payment is with gift money from relatives. However, the amount of gift money you use can actually affect the mortgage type for which you qualify. Learn more about how using gift money impacts your loan approval with our guide to using gift money for your down payment.
Take a Higher Interest Rate
If your score is high enough, you can apply for a mortgage now and accept a higher interest rate. If you rebuild your credit over the next few years, you may be able to refinance your home at a lower interest rate. One thing to keep in mind is that you have no guarantee that lower interest rates will be available when you’re ready to refinance.
Get an FHA Loan
You can qualify for an FHA loan with a score as low as 580. An FHA loan may also be beneficial because it allows for a co-borrower who does not reside in the home. This means that a trusted friend or relative can cosign your loan so you can become a homeowner.
Rent and Rebuild Your Credit Score
If now isn’t the right time for you, another option is to rent for a couple more years while you rebuild your credit score.
Paying more attention to your finances is essential to improving your credit score. Mint.com is a popular tool for people who want to do just that. It’s a web-based application that aggregates your financial information and allows you to set up alerts, create budgets and track investments for free.
Don’t let a low credit score stop you from investing in a home. First, find out where your credit stands with a free credit report from QLCredit. Then, talk with a Home Loan Expert to see what your options are.
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