Purchasing a home is a complex process, as any homebuyer will tell you. With so many moving parts, it’s difficult for most first-time homebuyers to understand what lenders are looking for. The golden standard that most buyers are aware of is a credit score of 800 or more and at least 20% down.
Those numbers may seem simple, but they are lofty goals to achieve. It can take months, even years, to bring a credit score to the 800 range, and even longer to save 20% much for house. Many home buyers find themselves falling short, which may impact their chances for loan approval.
If this sounds like you, don’t fret – you can still purchase a home without the perfect 800 score and 20% down payment. As with anything in the real estate world, other options are available.
The Truth about Credit Scores
Lenders look at many things when you apply for a loan – they evaluate your debt, income and savings, but the biggest factor is your credit score. Those three little numbers indicate whether you’re a safe bet that will return the funds you borrow for your home. And lenders love a safe bet.
That’s why it’s a good idea to track your credit by requesting a copy of your credit report and score at least once per year. Plenty of online tools can give you a free estimate of your credit report, but you will have to pay for your FICO credit score, which nearly every lender uses.
Once you have your credit score, you’ll have a better idea of where you’re standing credit-wise. Keep in mind not to focus on the number itself, but rather the range it falls in. Most lending companies look at credit scores in rankings, which usually break down like this:
- Excellent: 781- 850
- Good: 661 – 780
- Fair: 601 – 780
- Poor: 501 – 600
- Bad: Below 500
Obviously, the higher the credit the better opportunity you have for a loan approval with a low monthly payment and interest. But if your credit ranges anywhere below Fair, there are still other options to consider for an affordable loan.
If you have Low Credit
If your credit score falls into a poor or bad credit range, getting a home loan approval may take some effort. It’s not impossible as long as you are adequately prepared and can prove that you can handle money and pay off your debts.
1. Save up a larger down payment
Keep in mind that it’s not always about your score – lenders just want to be sure that you are financially responsible. One way to prove this is with a high down payment of 20% or more. The ability to save up that kind of money is an indicator that you are financially sound and are able to handle a loan, even if that may not be reflected in your credit history. A large down payment will also lower your loan to value ratio, giving your home instant equity. So, it’s a win-win.
However, 20% is not an easy amount to save up, much less exceed. Fortunately, if you have a credit score above 580, there are other options to consider.
2. Get Organized
Tedious paperwork feels like the life-blood of the home loan approval program, but it’s a necessary evil – especially if you have bad credit. You can use your financial history to prove you pay bills on time, save money and had the ability to pay off previous debts. Track down all of your financial paperwork in preparation for requesting a loan – most lenders have certain documents they require, usually including:
- Previous Year’s Tax Returns
- Pay Stubs
- Bank Statements
- Statements for Investments
- Statements for Retirement Accounts
- List of Debts (with amount owed and monthly payments)
3. Consider a Co-signer
A co-signer is basically someone that agrees to take on joint-responsibility of the loan, offering more security to the lender if you default. If you have bad credit, or not enough history to accumulate credit, a co-signer improves your chances of loan approval. Just be sure to ask someone with good credit and don’t miss a payment – it could impact their credit score.
Other Loans to Consider
Bad credit makes securing a conventional loan difficult; however, there are other programs you can turn to if you’re hoping to purchase a home with less than stellar credit. The most common is an FHA Loan, which is backed by the Federal Housing Administration and has much more lenient requirements for approval. FHA loans have been approved for credit scores as low as 580 and only require a minimum down payment of 3.5%.
Low credit scores make the home buying process tricky, but not impossible. As long as you have a plan and the necessary paperwork in place, you can prove your ability to handle a loan to lenders. Continue researching options until you find the best one for you.