6 Tips for buying a home when you have bad credit

While many conventional mortgages do have a minimum qualifying score, options are available for borrowers with lower scores.

If you’re concerned that your credit score isn’t high enough to purchase a home, you may still have options to make homebuying a reality.

Every prospective homebuyer knows that their credit score is an important factor in the financing options available to them when purchasing a new home.

If your credit score is less than ideal but you’re eager to begin the homebuying process, there are a few important things to know about how that number could affect your mortgage options and how to start improving it. Here are some solid tips for purchasing a home with bad credit.

How your credit score affects your mortgage options

A person’s FICO credit score informs lenders of how responsible that person has historically been with making payments on time and managing debt. The higher a person’s credit score, the lower their interest rate will generally be, as that borrower is perceived as less risky for the lender.

While a person’s FICO score impacts their ability to get a loan and determines interest rates, it’s not the only factor. In addition to their credit score, lenders take a holistic view by considering a person’s total amount of debt, total assets, savings and income.

When evaluating a person’s credit score, lenders will consider both the type of loan the prospective borrower can apply for and the interest rates available based on their score. This is especially true if you’re applying for a government-backed loan with no or a low down payment, such as U.S. Department of agriculture (USDA) loans, federal housing authority (FHA) loans and veterans affairs (VA) loans. Because these loans allow buyers to put down 3 percent or less (instead of the conventional 5 to 20 percent), lenders may look more closely at your credit score and debt-to-income (DTI) ratio to determine how much of a loan you qualify for.

What is A ‘good’ credit score when applying for A mortgage?

When applying for a conventional loan, borrowers should have a credit score of at least 620 to get approved. The average score for successful mortgages is about 720. If your score is lower, don’t worry: A score below 620 won’t necessarily disqualify you from receiving a mortgage loan.

When you work with a mortgage lender such as newrez, a trusted loan adviser can help you understand all the potential options you may have based on your credit score. Before you speak to an adviser, you can use newrez’s online home loan amount estimator tool to run some preliminary numbers. In just a few seconds, you’ll get an idea of how much of a loan you may qualify for with your current monthly debt payments and income.

Tips for buying A home with bad credit

Timing can make a big difference in homebuying, both in terms of market conditions and your ability to qualify for a mortgage. If you want to boost your credit score before you apply for a mortgage, or simply want to improve your chances of getting the mortgage loan you need, here are a few actions you can take right now.

1. Review and understand any derogatory marks on your credit report

A credit report will tell you what your credit score is through the three major credit bureaus: equifax, experian and transunion. If that number is at or below 620, analyze your credit report to see where you can make improvements.

If you have any “derogatory marks” such as late or missed payments, this can negatively impact your score. Fortunately, these marks will be removed from your report after a certain period — typically around seven years — so if you had any negative reports but you’re almost at the end of that time period, you may be able to achieve a higher credit score simply by waiting it out.

There is also the possibility that an inaccuracy in your credit report is contributing to a lower score. If you spot something that looks wrong, such as an account you don’t recognize, contact the credit bureaus to have the error corrected, following these directions from the consumer financial protection bureau.

2. Don’t open new credit accounts

Each time you open a new credit account, like a vehicle loan, a personal loan or even a credit card, a hard credit inquiry is made. These hard inquiries cause a temporary drop in your credit score. So if possible, stick with the existing credit accounts you have open in the year or two before you decide to apply for a mortgage.

3. Work toward paying off other debts

A borrower’s debt-to-income ratio (DTI) is just as important as their credit score in determining what type and amount of loan they may qualify for. If your credit score is on the lower side, a good DTI ratio can help reduce your riskiness in the eyes of a mortgage lender. Focusing on paying off debts not only immediately improves your DTI ratio, but it also improves your credit score in the long run by lowering your overall credit use percentage. Additionally, every on-time payment you make reflects favorably on your credit report.

4. Keep saving for your down payment

While you don’t necessarily need to be able to make a full 20 percent down payment on a home, the closer you can get to that number, the better — especially if your credit score is lower. Like reducing your DTI ratio, demonstrating that you have a sizable amount of cash saved up can boost a lender’s confidence in your ability to make payments.

5. Apply for pre-qualification and/or pre-approval

Going through the pre-qualification and pre-approval process for a home loan gives prospective borrowers the opportunity to sit down with a loan adviser and understand what kind of mortgage they may qualify for. Your adviser can offer insight into what you can do in the near term to boost your chances of qualifying for a higher loan amount or more favorable terms, such as by boosting your credit score.

6. Find A trusted lender to help you through the process

It’s important to find a lender you trust, particularly if you’re concerned about your credit score. Companies like newrez prioritize the homeowner during the mortgage experience and can help them better understand their options based on their current circumstances and credit score. A newrez loan adviser will take the time to learn about you and your situation to guide you in the right direction and get you the best loan possible.

If you’re uncertain about how your credit score will affect your mortgage options, contact newrez today to speak with a representative.