Home ownership is part of the American dream, but buying a home can be incredibly expensive. According to Zillow, the middle house in the United States costs just under $ 250,000. In some markets, you could pay twice as much as for the average house.
Few people can pay cash for such a large purchase, so most homebuyers get a mortgage to help them buy a home. However, you generally need to have good credit if you want to borrow money. If you have poor credit, buying a home can be more difficult, but it is always possible.
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How credit affects your ability to buy a home
Your credit score affects several things when it comes to applying for a loan, including mortgages.
The most obvious influence of credit scores is your ability to qualify for a loan. If you have very bad credit, many lenders will refuse to offer you a loan for fear that you will not pay off the loan. Secured loans, like mortgages, are less risky for lenders because they can foreclose the house, but they are still risky.
Your credit score also influences the interest rate on your loans. People with less credit will have to pay higher interest rates to offset the additional risk that the lender takes. Higher interest rates mean higher monthly payments and a higher total cost for the loan.
What to do before buying a house
Before you start shopping for a home, there are a few things you should do.
Check your credit
Keeping an eye on your credit is important for everyone, but it’s especially important for people who are about to apply for a large loan like a mortgage. You should check your credit to get an idea of your credit rating and the types of loans you may be eligible for.
There are many ways people can easily check their credit, starting with AnnualCreditReport.com. This is a government authorized website to give people free access to their credit report. You can use the instructions on the site to request a copy of your report from each of the three credit bureaus once a year.
If you want to check your credit more frequently, other services, like myFICO, can give you regular updates on your credit report and credit score. Many of these services also offer recommendations to lenders who work with people with your credit profile, or steps you can take to improve your credit.
Correct the mistakes
One of the easiest ways to improve your credit is to check your credit report for errors. Credit bureaus aren’t perfect, and mistakes are more common than you might think.
If you notice an issue on your credit report, such as an account that belongs to someone else or a payment that has been marked as overdue even though you submitted it on time, you should dispute that error.
Each credit bureau has a different process for disputing errors, so check the credit bureau’s website for the steps to take. Removing these errors can dramatically increase your score, especially if you remove missed or late payments or overdue accounts from your credit history.
Boost your credit as much as possible
Your credit score shows your history of interaction with credit and debt. The best way to build a good credit score is to have a long history of timely payments and to manage your credit well, but that doesn’t mean there isn’t a little you can do. do it in the short term to give your credit a boost.
The best way to increase your score in the short term is to pay off any debt you have. The more you can reduce your balance, the more it will improve your credit score.
Another thing to keep in mind is that applying for new loans and credit cards will lower your score by a few points because credit checks have such an effect. If you plan to apply for a large loan such as a mortgage, avoid applying for other loans in the months leading up to your mortgage application.
There are tools, like Experience boost, which help increase or find ways to improve your score. Any advantage that you can get is worth taking because even a small difference in your credit score can influence the interest rate on your loan.
How to buy a house with bad credit
There are some things you can do if you are trying to buy a home with bad credit.
Accept a higher interest rate
The reality for people with less than perfect credit is that they will have to accept higher interest rates on the loans to which they are entitled. If you go into the mortgage process knowing that you won’t get the best advertised interest rates, it may be easier to accept the higher rates that are offered to you.
Part of the cost is paying a higher interest rate if you want to buy a home now. If you can’t handle the higher rates, you may want to wait while you work to increase your credit score.
Apply for an FHA loan
The Federal Housing Administration (FHA) insures certain loans for people with poor credit. This makes FHA loans much easier to qualify than traditional mortgages. Another advantage is that FHA loans only require a down payment of 3.5% of the value of the home instead of the minimum of 10%.
The cost of an FHA loan is that you will have to pay for mortgage insurance. This is an additional cost added to your monthly payment and ranges from 0.45% to 1.05% of your loan balance.
Unlike private mortgage insurance (PMI) which applies to conventional mortgages, you cannot forgo paying mortgage insurance on FHA loans even after you have built up equity in your home. The only way to stop making those extra payments is to refinance the mortgage.
Make a big down payment
The main concern of lenders when making loans is whether the borrower will repay the money they borrow. If the borrower defaults, the lender loses the money they loaned and must try to get it back by foreclosing on the house.
To reduce the lender’s risk and increase your chances of qualifying for a loan, you can try offering more than the usual down payment on the house. This reduces the potential loss for the lender and shows that you are willing to put more of your own money on the line.
The more you invest in the home, the less likely a lender is to think that you will be ready to give up the loan. This can help you qualify for mortgages you might not otherwise be able to get or get lower interest rates.
Buying a home can be difficult, especially if your credit isn’t perfect. Still, it’s possible to get a mortgage with poor credit as long as you take the time to prepare and are willing to show lenders that you take the purchase seriously.