Can I Buy a Home with a Low Credit Score? What You Need to Know.
We’ve been asked time and time again, “if I have a low credit score, am I still able to buy a home?”
It is probably one of the leading questions that we receive daily, whether over the phone, during an in-person home consultation, or via messages through our Facebook page. People are stressing about their credit score, checking it constantly, opening credit cards, closing credit cards, asking their friends for advice, and sometimes disqualifying themselves from owning a home.
First, take a breath. You have come to the right place!
Buying a home is a big step! We definitely understand how you may be feeling. The stress of not knowing if you will get a loan to purchase a home is looming, but we are here to figure out a solution for you and your family as best we can.
However, and this may be news to some, credit scores are only one of the ways mortgage companies evaluate your dependability when they review a loan application.
But what does that mean exactly?
Well, it’s good news! It means that having a low credit score will rarely disqualify you from being approved for a mortgage.
So, now that there is some light at the end of the tunnel – let’s look at some of the different questions and assumptions made about credit scores.
Take Back Your Control
Outside of Braustin, your typical experience at a mobile home dealership may go a little like this:
- You’ll Walk In
- An Eager & Friendly Salesperson Meets You
- He or She Asks You a Few Questions
- They Try to Put You at Ease.
- They are Eager to Have You Fill Out Some Paperwork and Pull Your Credit Score.
And in that moment, you can pull the plug and confidently say NO.
You do not have to start with pulling your credit score. You should have a price range you are comfortable with already in your mind (see “3 Tips on Budgeting for a Mobile Home Purchase”), and a mobile home dealer does not need your credit score before submitting an application for a pre-approval of that amount to the bank.
Often, the common practice of finding your credit score prior to walking buyers through homes is specifically designed to price homes as high as possible.
Isn’t that a shame?
Braustin Pro Tip: Leave the credit reviewing to the loan officer assigned to your application, and if you can, get prices up front before you reveal anything about your finances.
How Is Credit Calculated?
If you wanted to know, a credit score is a number generated from several factors extracted from your credit history.
These Factors Include:
- Total Amount of Debt
- Type of Debt Accounts (Credit Card, Small Purchase Financing, Personal Loans, Mortgage, Leases, as well as Medical Bills)
- How Often Payments are Made on Time
- Amount of Time an Account has been Open
- Percentage of Credit Being Used on an Account
Did you know that there are three main credit bureaus that generate a score?
These agencies include:
It’s important to note, that these agencies can all vary from one to the other. Reason being, banks financing a mortgage have their own credit reporting systems, and a score you are checking on a free credit checking site can be off more than one hundred points in some cases.
100!? Wow, that’s quite a bit, and can make all the difference.
Your credit score can change for a variety of reasons, and sometimes, what seems like it will help raise your score could actually do the opposite and harm your credit score.
We like to recommend that you submit your loan request to the bank, receive feedback, and then make decisions about your credit.
Credit Score and Debt-to-Income Ratio
Like I mentioned earlier, your credit score is not the only part of your finances that is taken into consideration when you seek a home loan. Another factor – sometimes reflected in your credit score and sometimes not – is your debt-to-income ratio.
What does this other factor mean?
Well, it just means a loan officer is evaluating your income in relation to the amount of debt you currently have. Their job is to ensure that you will be able to successfully make the payments on your mortgage along with your current debts.
While a credit score might look good on paper, it will not fool a loan officer.
They will view everything from your:
- Credit History
- Monthly Expenses
To put this into perspective with an example, the loan officer will see that renter’s lease you broke back in 2006, and this can unfortunately affect your current overall score.
How Do I Improve my Credit Score?
Improving your credit score is all about establishing a proven track record of responsibility.
If you have a history of making late payments, start now by making payments on time. Also, split your payment in half, and pay per paycheck (if possible), this way your statement shows two payments per month. Even though it is the exact amount due, the repetition in payments actually helps to increase your score.
If you have a history of going over your credit limit, start now to pay down accounts that are near the limit.
If you have a history of financing everything you buy, do not open any new accounts, and make sure all the others are current.
Credit is like muscle – if you don’t use it, you will inevitably lose it.
Do not make the mistake of thinking paying everything off and having zero open lines of credit will improve your score. No credit might actually hurt your score. And by contrast, do not make the mistake of thinking you need to open five credit cards in order to build your credit.
A Department Store credit card may sound appealing at the time, but trust us when we say – the interest rates are not worth it!
Maintain what you can manage. Nothing more, and nothing less.
If you are approved for a loan with good terms and a reasonable down payment, the best thing to do is keep your head low and try not to do anything to call attention to your credit. Don’t let any place who does financing touch your credit (appliances, flat screens, furniture) while in the buying process and don’t pay off your car, credit cards, or other accounts in bulk.
Building your credit is all about discipline and consistency.
Calculating credit is not an exact science and banks don’t view it as such.
Can the Credit Bureaus Make Mistakes?
Truly, anyone can make a mistake. That’s just human nature…
Because credit bureaus are automatically pooling information from many different sources, there could be an instance when your credit score is incorrectly measured based on someone else’s poor credit choices.
Typically, this might happen in a situation where you have a father and son with identical names or someone else with your exact name. Companies make mistakes too and sometimes incorrectly report a bad event to the credit reporting agencies. It is also possible someone took out a loan or credit card in your name.
It is not common, but it can happen.
Before you apply for a loan would be the time to submit a dispute with the credit bureau and have the mistake corrected.
You Might Think It’s Worse Than It Is
The main takeaway I want to leave you with today is this: The only people who should give you specific advice or input on your credit is the bank potentially giving you a loan. They can give you specifics on why you may have or have not been approved with a high down payment and interest rate.
Remember, banks do want to loan you the money, but not if the bank feels the loan will be a considerable risk of loss for them.
Start now to be diligent with building a good credit history, save up your down payment, and know that with time your credit score will reflect those positive changes!
So that’s it: Can I Buy a Home with a Low Credit Score? What You Need to Know. This blog has been revised to keep information and images previously shared, current. Follow the links in this page to read more information on each topic. We would love to chat with you or hear about your experience on our Facebook page or through our Contact Form.