Understanding How Bad Credit Impacts Homebuying
Chances are if you are considering buying a home then you already know the role that your credit will play in the process. While bad credit will not completely prevent you from being able to make a purchase, it can make the process a little more difficult.
So how can home buyers with bad credit secure a mortgage? Read below to find out.
The reality of bad credit
A credit score with a few dings on it is fairly common. But if these dings are fairly consistent then you might find yourself in an uphill battle to get approved for a mortgage.
When reviewing your credit score lenders like to see a clean credit history. The better the score the less of a risk a buyer is considered.
While credit scores range from 300 to 850, scores in the low 600s typically qualify for a mortgage. However, mortgage applicants with a bad credit score need to understand that even though they can be approved it will come at a cost.
In order to offset the risk, lenders will offer a higher interest rate to potential buyers with lower credit scores. While a few percentage points might not seem like that big of a deal, this higher rate can have a significant impact over the life of the loan. In some cases, homeowners can expect to pay tens of thousands of dollars more than those with a better credit score.
How home buyers can improve their credit score
Stop 1: Check your score
Surprisingly, most people do not have an up-to-date snapshot of where their credit score stands. It is hard to improve your score if you don’t know what your score is. Therefore, the first step to improving your credit score is to understand what your current score is.
To see where your score currently sits, potential home buyers can order a copy of their credit report from one or all of the credit bureaus. With your credit reports in hand take the time to review in detail. It is very common for errors to show up on a credit report and these errors can be costly.
If when reviewing your credit report you come across a mistake be sure to take the necessary steps to get the mistake corrected. You will want to do this as soon as possible so that your score will be adjusted accordingly.
Step 2: Be Committed
The process for improving your credit score is not an overnight solution. Home buyers must be committed to working day in and day out to improve their overall score. This might mean making financial sacrifices in order to pay down outstanding credit card debt or other bills.
If there are any especially glaring issues with your credit report you must be prepared to explain to your lender how the situation came about and what you are actively doing to repair and prevent from happening again.
Step 3: Be Consistent
So once you know your score and you are committed to improving it, home buyers will now want to be consistent in their actions. One of the easiest ways to do this is to keep your credit card balance is low. Lenders prefer to see that potential home buyers utilize no more than 30% of their available credit. This means that if you have a $1,000 credit limit you should not have more than $300 outstanding.
Improving bad credit is not impossible but it will not happen immediately. Once you know where you stand you can create a game plan for moving ahead and getting your score to a level that will help you during the mortgage approval process.