Qualifying for a home loan is the first step in making a new home purchase. You need a lender pre-approval to shop for properties that you know you can afford. Several factors are considered when determining your eligibility as a borrower. Your median FICO® Score, which is comprised of credit information from the three major credit bureaus, determines your creditworthiness, loan qualification, and interest rate.
Your credit score is calculated based on your payment history, the total debt owed, length of credit history, and types of credit. It’s not impossible to become a homeowner with bad credit. There are lenders and types of home loans that you can qualify for with a score lower than 620, however, they come with higher interest rates and less attractive loan terms.
Can you buy a house with bad credit?
Borrowers with a FICO® Score under 670 are considered to have bad or subprime credit. The best way to buy a home with bad credit is to pay as much as you can in cash. Since your credit score affects the loan amount you qualify for, you can cover the difference by paying in cash and afford your ideal home.
When you do qualify for a bad credit mortgage loan, you will be paying higher monthly payments thanks to higher interest rates. As you build home equity, pay down debt, and repair your credit, you can always refinance your home loan for better terms.
1. Your credit affects your worthiness as a borrower
Most lenders will only consider borrowers with a minimum score of 620 – 640. They typically require a higher down payment and will charge a higher interest rate. Just because you agree to specific loan terms to make your initial home purchase doesn’t mean you can’t revisit them later. As the market fluctuates and your financial situation improves, you may consider refinancing your current home loan with your existing lender or a new one.
There are several pros of a refinance home loan, such as a lower interest rate and shortened loan term. You can convert your mortgage from a fixed-rate loan to an adjustable-rate mortgage and vice versa. Refinancing is a great way to increase the value of your home and pay for home improvements.
It’s also a possibility to refinance your mortgage to consolidate debt. Just as you can use calculators to determine your monthly payment amount on a new mortgage, you can head over to iSelect.com.au to compare refinancing options for your current mortgage.
2. Know what type of home you want to buy
Before seeking a new loan it helps to know what type of home you want to purchase and where. Most real estate markets are comprised of single-family homes. There are also duplexes which are two homes with separate entrances and a shared common wall. Condominiums are privately-owned units in a multi-family building in which you own the interior of the unit only and have access to shared common areas and amenities.
Townhomes are multi-story homes built side-by-side and share one or two walls with neighboring units. Determining which type of home is right for you depends on how much space you need, the total cost of each type of home, and any additional fees and taxes you might be responsible for.
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3. Your down payment amount determines your mortgage type
Borrowers who can pay a higher down payment, meaning 20 percent or more, are considered less risky by lenders. Putting down less than 20 percent may come with the requirement to pay for private mortgage insurance or PMI. This insurance policy protects the lender in the event you default on your monthly payments. The more money you can pay upfront the better, as you can save hundreds of dollars monthly by avoiding PMI.
You may find the best way to cut back on expenses, improve your credit, and save more money toward a home purchase is to downsize your lifestyle. Downsizing your living space does require decluttering and a willingness to part ways with unnecessary belongings.
The best way to keep your remaining personal belongings secure is to keep them in a storage facility. Depending on your storage needs, you can find hundreds of self storage units in Houston offering great deals and special offers for new customers. Self-storage units feature climate control, security, and 24/7 access so you can access your personal storage at any time.
4. You should only buy a house you can afford to pay for
You must consider how your budget will change once you become a homeowner. Your monthly mortgage payment may be less than your monthly rent payment, but you also have to remember other expenses you’ll incur. You will be responsible for property taxes, homeowners insurance, routine maintenance, and repair costs in addition to potentially higher utility bills.
Your credit affects your ability to qualify for a home loan and determines how much of a home you can afford to buy.