For those looking to become homeowners in 2023, the process may seem overwhelming at face value. With the certainty of a credit check on the horizon, some potential buyers might be discouraged by the barrier when trying to buy real estate.
While having a good credit score can prove advantageous for prospective homebuyers, not everyone may have an ideal score. So, what options do these people have? Let’s look at ways to buy a house with bad credit in 2023.
Before we go into more detail about how to buy real estate with poor credit, it's important to understand why this goal is challenging.
Many people have heard of credit scores but might not be fully aware of what their score means for their financial future. The Consumer Financial Protection Bureau (CFPB) defines it as a prediction of someone’s credit behavior. The number usually ranges from 300-850 and is determined by the following:
An individual’s credit score is calculated by the three main credit bureaus: Equifax, Experian and TransUnion. Mortgage lenders are going to request credit reports from these organizations in order to assist them in making choices about the loan terms.
Consumers need to pay attention to their scores and work towards the highest score possible for several reasons. A number of organizations ask for credit reports from credit bureaus to assist them in a thorough analysis of individual financial reliability.
Here is a quick breakdown of credit scores ranges and their meanings:
Landlords, credit score companies, loan officers, and, most importantly for this topic, mortgage lenders all look at credit scores to determine things like the interest rate, loan terms and qualification status. In the context of buying a house, having a low credit score can make the process harder. It's especially important for obtaining a mortgage that is affordable for the borrower.
The bottom line is that the better your credit score, the better your mortgage interest rate is likely to be. In general, a borrower with a good score will be more likely to qualify for the loan in the first place than someone with a lower credit score.
Most commonly, lenders look at an individual’s credit score when an applicant submits paperwork for a conventional mortgage according to CFPB. If someone has a low credit score, there is a chance that they will pay a higher interest rate and have more difficulty getting a mortgage.
It's likely that a financial professional will urge an individual with a low credit score to work on improving it before trying to buy a house. The first step is to check your score through an accredited source. For example, it's common to use a credit monitoring service to keep a watchful eye on the score.
CFPB reports that companies that offer credit scores don’t use the same score model as lenders. According to CFPB, you have the right to request one free copy of your credit report each year from each of the three major consumer reporting companies (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com. You might also access your credit report or monitor your credit via free services offered by some financial institutions, e.g., your primary banking institutions, and your credit card companies, etc.
A few simple ways to improve your credit score include:
Keep in mind that a financial advisor would be able to provide individualized ways for you to improve your credit score, which could prove to be most effective.
While working to get a better credit score is usually the preferred method of getting a house, that avenue is not always available. It may also take months or even years to see changes and improvement in your credit score. If this is the case for you, there are specific home loans that are designed with this need in mind.
Your banker or a mortgage loan officer can help you determine which one would be best for your goals and financial situation, but this checklist can give you a good starting point.
The Federal Housing Administration (FHA) is part of U.S. Department of Housing and Urban Department (HUD). FHA provides insurance on loans made by FHA-approved lenders. This loan option is available for those borrowers with a credit score as low as 500, in some cases. The caveat is that the applicant is likely to be required to put 10% down as an initial payment for an FHA loan and may have a higher monthly mortgage payment.
One of the most common loans that people with lower credit score apply for is the Home Possible® loan. It was designed to be more flexible for those who are struggling with their credit and low-to-moderate-income people who want to become homeowners. One reason this is possible is that it allows for co-borrowers who do not live in the home to be included on the mortgage, which could help those who have a low credit score. Borrowers without a credit score can qualify for a Home Possible Mortgage, provided they have no less than 5% down payment.
The U.S. Department of Veterans Affairs offers loans for service members, Veterans and eligible surviving spouses. If the applicant meets the standard in other areas, the credit score requirements may be lessened. The VA doesn’t set a minimum credit score requirement, so each individual lender is able to make their own minimums.
This loan program is specially designed for those who have low income and those who have limited cash for a down payment. The better your credit score, the less you are likely to have to provide as a down payment. However, Fannie Mae HomeReady® Mortgage also usually accepts borrowers with a lower credit score as well. In addition, borrowers may be able to qualify for the program if they have no score at all.
As mentioned previously, the best way to get mortgage loan approval is to boost your credit score into the 600s at least and to save up some money for the down payment. Most mortgage professionals urge applicants to set a goal of saving 20% for the down payment. Here are some other strategies that could increase your chances of approval:
Whether you’re looking to boost your credit score or obtain a home loan, having the right team on your side makes all the difference. Cathay Bank is here to help you stay on track and guide you on your home buyer journey.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.