Having bad credit can significantly impact your financial life as this kind of credit rating puts potential borrowers at high risk of defaulting on a loan or not paying back their debt if they are approved for one in the first place.
Purchasing a home is sometimes thought to be impossible if you have bad credit. However, this isn’t necessarily the case. Having less than perfect credit can present challenges when shopping for a mortgage, but that doesn’t mean it is an insurmountable obstacle. There are loans specifically geared towards those with poor credit histories and there are steps that can be taken prior to applying.
For instance, requesting a free copy of your credit report and disputing any errors may improve your score significantly – many people find their scores jump after contesting mistakes on reports. Additionally, lenders may look at other factors such as debt-to-income ratios or loan products designed for those with lower incomes in consideration for qualification. Bottom line: bad credit does not mean you cannot purchase a house – exploring available options is the key to success!
Low scores often involve having a short credit history, late payments in the past, or too much debt relative to your income demands.
The Danger of Having Bad Credit Can Be Far-Reaching
Source: bankrate.com
Potential lenders may view you as too risky to lend money to, even if you apply for only small amounts, such as an installment loan or getting a line of credit with reasonable limits.
It can also have a negative impact on other aspects of your life, such as applying for housing or being offered specific job opportunities.
Another concern with interest rates rising is that a lender will tack on additional high-interest rates that may also be applied due to the perceived risk factor associated with someone with bad credit.
What Does It Mean to Have Bad Credit?
Source: badcredit.org
Having bad credit is common. It usually occurs when someone has a short credit history, a history of late payments, lots of debt relative to their income, or any combination of these factors.
Bad credit is typically associated with a FICO credit score between 300 and 579. This scoring range is considered “poor” by lenders and creditors, who use it to make lending decisions.
Having bad credit can make it difficult for you to be approved for loans or other types of financing.
Having bad credit means a person has a low credit score and missed or late payments of debt related to borrowing money, like a loan or credit card. This can make it difficult for that person to rent an apartment, get approved for another loan, or even purchase something as simple as internet or phone service.
Many lenders don’t want to take the risk of lending money to someone with bad credit because they may not be able to pay it back. Having a poor credit score can also increase interest rates on any loans that are granted and bring them into the “high risk” customer category. To avoid having bad credit, it is essential to keep up with payments on your bills and loans in order to maintain a positive credit history.
However, there are still ways to get the money you need, even with bad credit.
How Credit Score Is Determined
A credit score is a number lenders use to assess the risk of lending money to an individual. It is based on various factors, including payment history, credit utilization ratio, and length of credit history.
Payment history is the most important factor in determining a person’s credit score.
The longer the payment history, the more reliable it is.
The credit utilization ratio refers to how much debt one has compared to their available credit limit.
A high utilization ratio indicates too much debt and can have a negative effect on the credit score.
Lastly, the length of credit history determines how long a person has had access to credit accounts and how responsible they have been with them over time.
All these factors are considered when calculating an individual’s credit score.
How to Buy a House with Bad Credit
Source: self.inc
Buying a house with bad credit can be tricky, but it’s not impossible. You may need to look outside the traditional lending options to find a loan that works for you.
Several loan programs are available to those with a low credit score.
One of the things you need to understand before buying a house with bad credit is that many real estate agents prefer to work with pre approved clients, meaning that you’ve gone through the early stages of securing loan funding.
So if you’re interested in buying a home, either to live in or for rental income, before you race out and talk to luxury Bahamas real estate agents in Nassau or Hawaiian real estate agents, understand what types of financing you may qualify for first.
Too often, people get starry-eyed and unrealistic about their home-ownership opportunities, so before you reach out to an agent in an exotic location like the Bahamas or Hawaii or even contact a local agent in your area, get your financing in order.
It will save you and the real estate agent a ton of time and headaches if you know what’s available and get a pre-approval letter.
If you want to know 5 most common mistakes made by first-time house buyers click here.
Types of Loan Options Available to Persons with Bad Credit
Source: badcredit.org
The Federal Housing Administration (FHA) is one of the most popular options for those with bad credit, requiring a minimum FICO score of just 500.
The FHA also allows borrowers to use gifts from family members and grants from nonprofits to help cover their down payment and closing costs.
VA loans are another option for veterans who have served in the military, even with bad credit.
VA loans do not require a down payment and offer flexible terms. These loans are backed by the Department of Veterans Affairs and generally require a 620 FICO score.
Finally, some lenders specialize in providing bad-credit mortgages for people with less-than-perfect credit histories.
These lenders may charge higher interest rates than other lenders but may be willing to take on more risk to approve your loan application.
Regardless of your loan option, make sure you work with an experienced lender to help guide you through the process so you can buy your dream home with bad credit.
A good loan officer will educate you about where to apply for bad credit loans and ways to avoid your loans from being rejected and improve your chances for them to be approved.
