6 Tips For Home Buyers With Lower Credit Scores
If you have a low credit score or think you do, you have probably been told you won’t be able to buy a home. One of the questions I get asked the most is “Can you buy a home with bad credit?” Of the people that ask the question, Many of them end up qualifying more easily than they think. While it can be a little more complicated for those with bad credit one never knows unless they try.
The average credit score in the United States was 673 in 2016. You can certainly be below average and still be able to buy a home. Some loan programs will go as low as 580 or 600. Scores in the low 600’s will cause your interest rate to be a little higher and some bumps in the road along the way, but they won’t necessarily prevent you from buying a home.
Here are some tips for those of you with lower scores that still have the dream of home ownership.
Bring Your Own Down Payment
If your credit is on the lower end of the credit scale you may need to bring your own down payment to the table. Because a lower credit score is viewed as more risk in the lender’s eyes you may have to strengthen your case by creating your own equity in the home.
In some cases, a larger down payment will improve your chances of getting approved.
You May Need Reserves
Many of the clients I have helped buy homes with lower credit have had to have a few months of cash reserves in their bank account to prior to closing.
Reserves are extra funds you have access to that would support your monthly payment for a certain period of time. Reserve funds must come from your own accounts and must be liquid funds. You can use a retirement account as long as you have access to the funds if necessary. Reserve funds cannot be gifted like funds for a down payment or closing costs.
Don’t Go It Alone
Most people that are concerned about their credit will see their scores on sites like creditkarma.com or Experian.com. It seems like most of the credit cards available are also updating scores on their monthly statements. If you have seen your score, you may be trying to fix it on your own.
Contact a lender prior to trying to fix everything yourself. There may be things on your report that are more important to fix than others. If a lender can view your report they will be able to help you with a plan to improve your credit enough to get approved for a home loan.
If you are credit challenged your lender will have a lot of questions for you about your credit history. I can assure that they are not judging you rather trying to find an avenue for loan approval. It is important that you are open and honest about all of the questions they are asking.
You may also be required to write letters of explanation to the underwriter on your loan. A letter of explanation will explain what created the negative items on your report, how you have resolved them and what you are doing going forward to make sure those mistakes aren’t going to happen again.
As a credit challenged borrower it may take a little longer to get pre-approved or close your loan. While there is a lot of paperwork for every borrower there will be more for those with credit challenges. While it can be frustrating, be patient and work with your lender on their paperwork requests.
If you are a credit challenged borrower, it may be best to have your file underwritten upfront. This will help make sure your loan will get approved when you make an offer on a home. This will take a little more time upfront. However, the confidence when making an offer will be worth it.
Don’t Give Up
If you have been turned down by a lender in the past and are serious about buying a home try another lender. While most lenders will use the same guidelines for the primary loan programs. Some lenders have less stringent underwriting standards and some lenders may have more experience or time to deal with credit challenged borrowers.
The answer to “Can you buy a home with bad credit?” is almost always a definite maybe.
My best advice is to stop from disqualifying yourself. If you are serious about buying a home and think you are lacking in the credit department, I would be more than happy to look over your credit report with you and develop a plan that will get you on the path to home ownership. CLICK HERE TO SCHEDULE A TIME TO TALK