Financing a home is one the biggest purchases in a person's life; and one of the major factors that affects any home purchase is the credit score. While having a low credit score can certainly make this process more difficult, it’s possible to find financing for any credit score. Understanding your credit score and what it means is key when looking to finance a home.
What Is “Bad Credit”
In home buying, as noted by Home Loans For All, anything under a 620 credit score is likely to be difficult to secure financing with. That’s not to say it’s impossible to secure financing under this, and there are options specifically for this, it’s going to likely be more difficult and costly.
It’s also important to keep in mind that all scores over 620 are not created equal either. Even a few points can mean thousands in additional interest payments. While you might be able to secure a loan with 620, you definitely won’t get the best rates. Having a higher credit score can literally mean extra money in your pocket.
What If I Have Bad Credit?
So you have bad credit, but it’s not the end of the world when looking to secure home financing. There are multiple ways a potential home buyer can attempt to offset a poor credit score and make themselves more attractive to lenders.
Specialty Loans FHA/VA
For those with low credit scores, looking into government sponsored loans is a good idea to acquire financing. Loans like FHA are available to a wide range of people, and have much lower credit score requirements than traditional loans. While there are certainly drawbacks, it’s a great option for those who meet the other requirements. For example, an FHA loan has only a credit score requirement of 580 with a 3.5% down payment and no hard limit for those with 10% to put down.
There’s also specialty loans like VA loans for veterans than can help secure home financing for low credit borrowers. While these types of loans have stricter eligibility requirements, they are often great ideas for borrowers of any credit scores.
Higher Down Payment
Many lenders are willing to work with lower credit score individuals if they are able to make it up in another category such as down payment. Coming to the table with a higher down payment is a great way to offset a lower credit score.
Coming up with a larger down payment inherently reduces risk for lenders. Most look for around 20% for a traditional loan, so having more than this is a definite plus. A larger down payment is one of the best ways to reduce risk for a lender as it assures them a good amount of their money back should the buyer default. While it can be difficult to save enough to break the 20% mark, it’s a fantastic way to appeal to lenders.
Co-Borrower
If the above don’t apply, coming in with a co-borrower that does have good credit is another great way to secure financing. A co-borrower is someone who signs on the loan with the buyer, and promises to repay the loan should the primary borrower default on the loan.
The key with a co-borrower is that they are liable for any missed payments and have just as much responsibility as the primary borrower to repay the loan. This represents much less of a risk for the bank as they now have more than one individual responsible for payments. That means whoever you ask to be your co-borrower should have good credit and be someone that trusts the buyer as they are responsible for payments.
Finding Home Financing for Any Credit Score
Whatever your credit score it’s possible to secure home financing. While having a low credit score is certainly not the ideal situation, it doesn’t exclude you from acquiring home financing. By utilizing the various programs and options even those with poor or bad credit can hope to own a home. There are options available for any credit score to buy the home of their dreams!
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