Mortgage Options With Not-So-Good Credit
You have found your dream home and you can’t help but think about how wonderful it is going to be to have your entire family gathered around the dining table at Thanksgiving and Christmas. After dinner, the adults will sit around and talk while the kids play games in front of the fireplace. Dinner clean-up was a breeze with your fabulous new kitchen and all that is left to do after everyone leaves is to curl up with a blanket and a good book in front of the crackling fire!
Sounds fabulous, right?! Before even getting to this point, it is important to understand your credit score and the options that are available to you.
UNDERSTAND YOUR CREDIT SCORE
According to Bankrate.com, 800+ is an exceptional credit score; 740-749 is very good; 670-739 is good (and represents the median credit score range); 580-669 is below average; and 579 or less is considered poor. According to Fair Isaac Corporation, which calculates the FICO score, the average FICO score in America recently topped out at 704. Around 28% of Americans have scores below 600, which the credit bureau Experian considers to be subprime. Even an “average” credit score of 675 is too low to qualify for the best rates on conventional mortgages. But as you can see, you are not alone if you have what is considered to be a subprime FICO score.
You are allowed to view your credit report for free on each of the reporting bureaus one time each year. You can access your free reports by visiting AnnualCreditReport.com. According to a Federal Trade Commission study in 2012, about 25% of people had an error on their report that resulted in negatively impacting their score. Take the time to review each report and correct any errors you find.
If your credit score is less than stellar, there are a few things you can do to improve your score. The FICO score is made up of five main components: payment history, amount of credit, length of credit history, number of new credit applications, and the mix of credit you have. The largest component of your score, payment history, accounts for 35% of your score. Making payments on time can quickly increase your score.
Accounting for 30% of your score is the amount of debt you have. Ideally, you should pay off credit card balances each month. If that is not possible, limit your credit spending to less than 30% of the available credit that you have. For example, a credit card with a $10,000 limit should have no more than $3,000 in charges on it. Focusing on these two areas, which accounts for 65% of your score, will greatly impact your credit score.
UNDERSTAND YOUR OPTIONS
If you don’t have a good credit score, is home financing impossible? Not necessarily!
Conventional loans tend to not be very flexible regarding certain loan criteria. According to Janet Bretland of loanDepot in Troy, Ohio, government-issued financing (FHA and VA loans) can offer a challenged borrower some flexibility when conventional lending is not an option. FHA can offer mortgage approvals to those with medium-to-low credit scores, lower income or income from numerous sources, borrowers who won’t be living in the home (i.e., investment property), properties in need of repair, or the use of “gift money” for a down payment when a buyer doesn’t have enough of their own resources for a down payment.
According to Ms. Bretland, “Most lenders require a (credit) score of at least 620-640, but not all. For example, loanDepot, America’s second largest non-depository lender in the United States, follows lending guidelines set forth by FHA, and evaluates each borrower individually.” Don’t just assume that you cannot purchase a home because of a low credit score or circumstances beyond your control!
VA loans also offer some flexibility for veterans with a VA Certificate of Eligibility. Again, each client is evaluated individually to determine financing.
Ms. Bretland offers the following advice: “If borrowers have credit concerns, the very best thing they can do for themselves is connect with a lending professional who will take the time to offer suggestions and advice to help them get positioned for home ownership. Remember, the best defense is a good offense!”
Special thanks to Janet Bretland of loanDepot in Troy, Ohio, for her contributions to the research for this blog. For more information, feel free to contact her at loanDepot in Troy or call her at 937-875-0645.