Is Home Ownership Possible with Bad Credit?
You’re ready to move out of your rental and start a new life in a home of your own. The problem is, you’ve had some credit issues in the past. A late payment here and there, too much debt, or even collection accounts are dragging your credit score down. A low credit score can have a serious impact on your ability to get a mortgage, but it’s not impossible. In fact, many people with bad credit become homeowners every day.
Here's what you need to know.
Steps Towards Mortgage Approval
As an umbrella term, credit repair. is any steps you take specifically to improve a bad credit score.
Generally, credit repair falls into two areas:
– Fixing incorrect information in your credit report.
– Changing your spending and borrowing habits so that your credit improves over time.
There is no quick solution to the latter. The former is often an easy fix, but can become complicated if you have become a victim of identity theft (this is one time when it might be a good idea to hire a professional).
Legitimate negative information stays on your credit report for seven to ten years, but that doesn’t mean that changing your credit habits now won’t benefit you even in the fairly short term.
Check Your Credit Report
Before you ever talk to a lender, make sure you have a clear understanding of your credit history and you’re aware of your credit score. You can obtain a free copy of your credit report from each of the three major credit reporting agencies online, in writing, or by telephone once a year. You’ll receive an itemized history of all of your credit accounts including the following information:
- Names, addresses, and information for companies you have had, or have, credit accounts with.
- Beginning balance, current balance, and payment history for each account.
- Any collection accounts, judgements, or bankruptcies that have been filed against you.
Double check each entry and make sure that the information is accurate, complete, and up-to-date.
If you find any errors on your credit report, no matter how small, contact the credit bureau to dispute the entry. The bureau will investigate your claim and give the creditor 30 days to either confirm the account is valid, or remove it from your report.
Get Your Credit Score
Getting a copy of your credit report will help you find out where you stand with your accounts, but it won’t give you one vital piece of information, your credit score. This is a three-digit number assigned to you based on your credit history. Credit scores can range from 300 at the lowest end to 850 as a high score. Knowing your score in advance will help you determine your next steps.
- Some credit card companies provide their cardholders with a free credit score, ask if yours does.
- Use a service like Credit Karma to find out what your current FICO score is.
What Does My Credit Score Mean?
As mentioned above, credit scores fall into ranges and they are used to determine a loan applicant’s ability to repay borrowed money. The lower a person’s score is, the harder it will be to obtain a loan, and if a loan is approved, the rate and terms will be less desirable than for someone with a high score.
- Credit Score 800 to 850
Scores in this range are considered excellent. Borrowers at this level are considered low risk and therefore may receive lower interest rates.
- Credit Score 740 to 799
While not perfect, this score range is considered very good by lenders. These borrowers are still considered a low risk, and are rewarded with better rates.
- Credit Score 670 to 739
This range of credit scores is considered good, and it’s right around the national average in the U.S. Rates at this level are competitive, but not as good as the higher levels.
- Credit Score 580 to 669
Scores that are less than 670, but higher than 580, fall into the fair category due to some dings in the credit history. It’s difficult to obtain a loan at this level, and rates are high.
- Credit Score Under 580
This is the lowest level for a credit score and is considered poo due to multiple defaults, recurring late payments, or a bankruptcy. It’s difficult to get credit at this level.
Credit Score Boosting Tips
If you find that your credit score is less than good, don’t let that stop you from realizing your dream of home ownership. There are a few things that you can do to boost it and increase your odds of getting approved for a home loan.
- Dispute Credit Report Errors
If you find any errors on your credit report, no matter how small, contact the credit bureau to dispute the entry. The bureau will investigate your claim and give the creditor 30 days to either confirm the account is valid, or remove it from your report.
- Reduce Your Credit Utilization Ratio
The lower your balances are on credit cards and other accounts in comparison to your credit limit, the better. Pay down the balances on all of your credit cards so that your credit utilization rate is around 30% or less to become more attractive to lenders.
- Get Collection Accounts Removed
Past collection accounts, even if they’ve been paid off can bring your credit score down. Contact the creditor and ask if you can pay to have the collection removed from your credit report altogether. If you can, you’ll see an increase in your score almost immediately.
- Negotiate Debt Settlements
The amount of outstanding unsecured debt that you have can have a serious impact on your ability to get a home loan. Debt settlement companies like Debt Blue can help you negotiate a fair settlement for these debts so that you can get your financial life back on track.
What's there left to do?
Final Steps to Mortgage Approval
Once you’ve taken a good look at your credit history, corrected errors, and reduced your debts, it’s time to get serious about applying for a mortgage. There’s still some work to be done, however. Your credit history and score are only two components of mortgage underwriting. Here are some other things that you’ll need to focus on to ensure that you’ll get approved.
Determine Your Budget
It’s tempting to think about the monthly payments on a mortgage as the main factor in determining how much house you can afford. While it’s certainly important to make sure you can afford these payments, they’re not the only thing to think about. In fact, the payment amount is less important that some other key factors:
Up-Front Costs
These are the initial costs of buying your home and moving in. They include the following:
- Down Payment
Generally, you’ll be required to provide a down payment that is equal to 20% of your home’s value. The larger the down payment, the lower the loan amount, which makes it less risky for the lender.
- Closing Costs
This includes items such as appraisal fees, title insurance, and property taxes. In general, you can expect to pay between 3% and 5% of a home’s value in closing costs. In some cases, closing costs can be included in the loan amount, however, this is not always the case.
- Moving Expenses
You’ll also want to consider moving expenses. Professional movers can be expensive, but they’ll do the heavy lifting for you. You can save money doing it yourself, but you’ll still incur costs if you rent a truck, and buy packing materials.
- Utility Hookups
Gas, electric, water, sewer, trash, internet, and cable TV are all essential utilities. Getting connected may require a security deposit. Set aside enough funds to ensure that you’re able to get your utilities turned on before your move-in date so you’re comfortable.
- Furnishing Your Home
An often overlooked expense is furnishing a new home. Those few pieces from your apartment aren’t going to be enough to make your home comfortable. At a minimum, you’ll need the essentials like a bed, some living room furniture and a table and chairs.
So What's the Verdict?
Just because you’ve experienced credit issues in the past, it doesn’t mean you can’t buy your own home. It’s a bit more of a challenge, there’s no denying that, but with a little help, you can be on your way to home ownership. It all begins with repairing your credit so that you’re not considered a risk by lenders. Contact us at Debt Blue to discuss ways that you can reduce your debt load, improve your credit history, and increase your credit score.