Millions of Americans find themselves with poor credit due to periods of unemployment, unforeseen illnesses, loan debt and other reasons. Regardless of the reason, many with a less than stellar credit score find that they have difficulty qualifying for a mortgage. If you find yourself in this situation, don’t give up on owning your own home just yet; there are mortgage options that can work for individuals with lower credit scores and ways for you to increase your score so you can get a mortgage more easily in the future.
What Is Your Credit Score, and What Constitutes ‘Poor’ Credit?
Your score summarizes your creditworthiness. It takes into account your past behavior, if you’ve paid your bills, the type of credit you have (credit cards, student loans, mortgages, etc.) and how much credit you’ve used. It’s meant to show your ability to pay debts in the future and can give insight as to how reliable you are in terms of borrowing and repaying.
This is important, because the more reliable you are, the higher your score will be. If you’ve had difficulty paying your expenses in the past, your credit score will reflect this and be lower than had you paid them on time. When you apply for credit in the future, you might be considered unreliable, and a lender might think you won’t be able to pay your debts.
You want to strive for having a higher credit score, as the higher your score is, the lower your interest rates could be. Your credit score can range from 300 to 850. Generally, 700 or above is considered good or excellent, and under 580 is considered poor.
If you have a lower credit score, an FHA loan may be right for you. The Federal Housing Administration (FHA) offers a government-insured loan with easier credit qualifying guidelines. This particular type of loan offers lower down payments, low-equity refinances, and oftentimes lower interest rates. If you have a credit score of at least 580, your down payment can be as low as 3.5%. The FHA will entertain scores that are less than 580, but your minimum down payment would increase to 10%. Lenders vary, but Quicken Loans won’t lend to anyone with a score of less than 580.
If you’re already in an FHA loan and looking to refinance, consider an FHA Streamline. There is generally no appraisal required, and usually you only need to provide limited documentation.
FHA loans do have certain requirements for those who have filed for bankruptcy. There’s typically a waiting period for you to apply for a loan after a discharge or dismissal. However, the length of time depends on the type of bankruptcy. Ask your lender for more details.
Veterans Affairs (VA) loans are for current or former members of the military as well as spouses of deceased military members.
There are several benefits of obtaining a VA loan. Because the Department of Veterans Affairs backs these loans, they have less stringent credit guidelines. Mortgage insurance is also waived, and there is no down payment required. Instead of reviewing only your credit score, the lender reviews your entire loan profile, taking into consideration why your credit is poor when making a lending decision. Some lenders may still have minimum credit score requirements. Quicken Loans requires a score of 620 to get a VA loan.
As with FHA loans, VA loans also have specific requirements for those who have filed bankruptcy, so be sure to ask your lender about them if you’ve filed for bankruptcy in the past.
Make a Larger Down Payment
Making a larger down payment will signal to your lender that you’re more creditworthy, giving you a better chance of getting approved for your mortgage and possibly lowering your interest rate.
If you’re financially secure today, you will have a better chance of getting approved and obtaining a lower interest rate, even though your past financial decisions negatively influenced your score.
Making a larger down payment will signal to your lender that you can be trusted. It also reduces the lender’s risk because they’re lending you a smaller amount of money. This will save you hundreds of dollars on interest in the long run.
Understand Your Score
It’s essential that you understand your credit score and why you have poor credit. Whatever your reason is for having a lower score, reviewing your credit report will help you better understand what you’ve done wrong, what you’ve done right, and how you can improve your score overall. QLCredit shows you your credit score free of charge and can assist you in finding solutions to your credit goals.
Improve Your Score
The good news is that there are several ways to improve your credit score. Paying off debts when they’re due and living within your means go a long way in maintaining a good credit score. Don’t open too many credit cards at once and never charge what you can’t afford to pay off that same month. When you do check your credit report, make sure there are no errors or fraudulent activity that may have lowered your score.
Bad credit need not follow you forever. If you’ve already applied for a mortgage and been denied, you can reapply once your score has improved. If you’re looking now, there are mortgage options for people who want to purchase a home today and steps you can take to make your score better for the future.
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