If you’ve reached that point where now is the time to start thinking about buying your first home, you might be looking back on the past several years with a little bit of regret.
Or maybe a lot of regret if you’re realizing you haven’t made the best financial decisions – and you’re worried about how you’re going to get approved for a mortgage.
Before you start berating yourself for not being as wise with your money as you could have been, just realize you’re not alone. It’s more common than you think for people to get themselves in a whole world of financial trouble.
It’s often many people’s ‘dirty little secret’. But, it’s nothing to be ashamed of.
According to FICO score statistics for 2020,11.1% of American consumers have FICO scores below 550. A score of 550 is really low, as you’ll see below. And that percentage of Americans is around 36 million.
That’s a lot of people! It should make you feel a little better knowing there are millions of people in the same boat as you.
And today’s a new day. You can always start fresh. Especially now that you have such a big, awesome goal to focus on – buying your first home.
Since we all know that becoming good with our finances is so empowering, it’s never too late – or too early – to teach yourself skills like managing debt, budgeting, saving, investing, earning, etc.
Here’s one simple way to get started. It’s the free personal budgeting app Mint. You can read this review in Forbes here.
In the meantime, this article is going to help you figure out how you can get approved for a mortgage to purchase your new home – starting right where you are today. No matter what your credit score is.
It might not happen tomorrow or even next month. You might have to work on repairing your credit for several months or so.
And it most likely means your first home won’t be a brand new five-bedroom, 3-bath, 3,000 sq. ft. modern farmhouse. But, your new home – no matter what size it is – will be your ‘castle’.
Here are some questions this article will answer:
- What is a credit score and what’s considered a bad score?
- How can I find out what my credit score is?
- Will I be able to get a mortgage with that score?
- How do I repair my credit?
- How long will it take?
There are several ways a person can buy their first home even with a bad credit score. Although people with low credit scores are usually not able to get approved for a conventional mortgage, there are other types of loans available – as well as alternative options. These non-traditional loans often come with higher upfront costs, higher interest rates, and additional fees. But for someone who is determined to make homeownership a reality sooner than later, there are options out there.
Let’s start with the basics:
What is a Credit Score?
According to the Consumer Financial Protection Bureau (CFPB), a credit score is a rating system that predicts how likely you are to pay back a loan on time.
The CFPB, by the way, is a U.S. government agency that makes sure banks, lenders, and other financial companies treat people fairly. You can click here to read their article with advice on getting a mortgage.
Companies use credit scores to help them determine if you are a good candidate for a mortgage, credit card, auto loan, or other credit product. They are also used to determine the interest rate you receive on a loan or credit card, and the credit limit.
Credit scores can also be called credit ratings or FICO scores.
FICO stands for Fair Isaac Corporation. This is the company who back in 1989 created the system that all lenders started using to calculate someone’s credit score.
Before this, banks and lenders all had their own unique formulas and calculations to determine someone’s credit worthiness. It was basically a mess before FICO’s new system standardized this all across the country.
There’s another company similar to FICO that has been around for a while now called Vantage. Credit bureaus also use the VantageScore system to calculate credit scores.
Credit scores range from 300 to 850. They are broken down this way below. The percentage amount is the weight given to each category. So at 35%, your payment history is the most important factor affecting your credit score.
This chart gives each of the five factors that make up your credit score and the priority given to each one:
| Factors That Make Up Your Credit Score | Percentage of Weight Given |
|---|---|
| Payment History | 35% |
| Amount Owed | 30% |
| Length of Credit History | 15% |
| New Credit | 10% |
| Credit Mix | 10% |
There are three credit bureaus (or credit reporting agencies) in the US whose job it is to collect everyone’s credit history; calculate credit scores; and provide credit reports to lenders and creditors.
These agencies are Equifax, Experian, and TransUnion. Each one might give you a slightly different credit score based on their own version of the FICO and Vantage scoring systems.
These agencies don’t actually make any decisions on your creditworthiness. They are only the data collection companies that provide all the data to the lenders, for them to make the decisions.
Below are the credit scores lenders will then use to determine someone’s creditworthiness:
| Credit Score Range | Credit Score Label |
|---|---|
| 300 – 579 | Poor |
| 580 – 669 | Fair |
| 670 – 739 | Good |
| 740 – 799 | Very Good |
| 800 – 850 | Excellent |
How You Can Find Out Your Credit Score
According to The Fair and Accurate Credit Transactions (FACT) Act, you have the right to one free credit report each year from each of the three nationwide credit bureaus.
You can get yours by clicking the website annualcreditreport.com or by calling them at 1-877-322-8228.
These credit reports don’t include your credit score, though. But they are still incredibly useful information. And it’s advised that you go through them thoroughly to not only learn everything you can about your current credit situation, but to check in case errors have been made.
A recent Consumer Reports study concluded that one-third of the participants found errors on their reports. These mistakes can be really dragging down a person’s credit score. Like a payment that was incorrectly filed as late.
It’s also common to have information on the reports that’s outdated and should already be off of them.
You can dispute any issues you see by contacting Equifax, Experian or TransUnion. Each of these credit bureaus has a process for correcting errors and out-of-date information.
When you want to find out your credit score, keep in mind that there are some websites online that are going to try and charge you for it. Don’t fall for them.
You don’t need the services they are going to try and sell you. Especially the companies who will try and get you to pay for their monthly credit monitoring subscription. It’s not necessary. Even when you’re trying to repair your credit.
Your money will be better spent paying down your debt than paying that new monthly bill.
Unless you are in a unique situation where your identity was stolen and you absolutely have to monitor your credit every month, these are not worth it.
Even if you are working diligently on getting your credit score up so you can get approved for a mortgage – you still don’t need to pay for this monitoring service. The mortgage facilitator you’re working with can do soft credit checks every now and then that won’t affect your score.
Here are the three credit bureaus and what they charge for your credit score:
| Credit Bureau | Do They Charge For a Credit Score? | What You Need to Pay for a Credit Score | Link to Their Website |
|---|---|---|---|
| Experian | Free | They give free credit scores. | here |
| Equifax | They Charge | You need to pay $1 for a 7-Day Trial, then $19.95 per month for credit monitoring. | here |
| TransUnion | They Charge | You need to sign up for their credit monitoring at $24.95 per month. | here |
Aside from getting your free score from Experian, there are a few instances when your credit score might be given to you.
If you’re applying for credit at a company, they might let you know what your score is.
Your credit card company or auto loan financing company might provide you with your credit score, as well.
If you decide to meet with a credit counselor or a HUD approved housing counselor, they will let you know your score in order to start helping you.
We’ll be creating a blog post soon all about this type of counseling. It’s an important topic. Because there are some shady credit counseling companies out there you need to look out for.
In the meantime, if you want to learn about the HUD approved housing counselors, you can click here to find one in your state.
Now that you have your credit score, is it good enough to get a mortgage?
How Your Credit Score Affects Your Ability to Get a Mortgage
If your credit score is between 300 and 499:
With a credit score is this low, your best option is to go in with another borrower whose credit is good enough to get approved. Otherwise your chances of getting a mortgage right now are slim to none.
This co-borrower is usually another family member willing to take on the risk of this mortgage with you. This is risky itself and not always an option, but it does work in some cases.
But at this credit score, the lenders are not considering you a viable candidate for a mortgage – even non-traditional ones geared towards people with lower credit scores.
Take heart that no matter what your credit score is, you can always work at improving it. And depending how motivated you are to purchase your first home, you can really double down over the next several months at improving your credit score.
Keep in mind that just like any goal you have – the more focused you are and the harder you work on it, the faster and better the results are going to be. Keep reading this blog post, because we have a handful of really impactful steps you can take.
In the meantime, Nerd Wallet has an excellent article with strategies on rebuilding your credit here.
If your credit score is between 500 and 579:
Since this range is still considered poor, your only option might be a non-conventional mortgage. These mortgages, backed by the government, include the FHA, VA, USDA and HUD Section 184 programs.
We’ll get into all of these in more detail in an upcoming blog post.
These non-conventional mortgages usually require borrowers to pay extra upfront costs and/or ongoing fees in addition to their monthly payment. But, they usually charge lower mortgage rates because they are insured by the federal government.
Here is basic information about three of these loans:
FHA loans. They are insured by the Federal Housing Administration and allow lenders to accept a credit score as low as 580 with a 3.5% down payment, or as low as 500 with a 10% down payment.
Here is the FHA website to find out more about this type of loan.
VA loans. If you’re a member of the military, a veteran, or married to someone who has served in the armed forces – one of your benefits is the VA loan program backed by the U.S. Department of Veterans Affairs.
You don’t have to come up with a down payment for this type of loan, and there are no minimum credit score requirements, although lenders do have their own credit standards.
Here is the VA loan website to find out more about this type of loan.
USDA loans. If you meet certain qualifications, earn less than a certain amount each year, and want to buy a property in a rural area – The Department of Agriculture-backed lending program can help you become a homeowner with low credit.
The good thing about this type of loan is that there are a lot more rural areas in the US than most people realize. It’s not just strictly farmland. The USDA’s standards on what makes up a rural area is quite broad.
Here is the USDA loan website to find out more about this type of loan.
There’s another type of loan for people with credit scores below 500. They are called alternative mortgage programs. Many applicants who apply for these types of loans are self-employed.
These programs are not backed by the government, so in addition to higher upfront costs, the mortgage rates are higher than conventional loans as well.
There’s still another type of home loan for borrowers with bad credit. They are called conventional non-conforming loans.
Both of these are options you can speak with your lender about – in case one might work for you.
As you can see, there are options for people who have bad credit. In this article, we’re not covering them all in detail. Our main point is to show you that you do have choices when it comes to mortgages.
The best thing to do to start the process of obtaining a mortgage, besides finding out your credit score, is finding the right mortgage lender who will explain all of your options.
If your credit score is between 580 and 619:
If your credit score is between these numbers, you’ve moved up from ‘poor’ to ‘fair’ and your options are getting better.
For example, you may qualify for an FHA loan where you only have to put a down payment as low as 3.5% compared to 10%.
Here is the FHA website again to check it out.
Since you already have a few good habits when it comes to your credit, you might find it easy to create some new habits and really bump up your credit score fast. Here is an article by Nerd Wallet on increasing your credit score by 100 points fast.
If your credit score is between 620 and 699:
At this range, you most likely have some good routines when it comes to your finances, but a few bad decisions might have set you back. You’re in the ‘fair to good’ category and you may be able to qualify for a conventional loan at this point.
If your credit score is between 700 and 739:
You’re safely in the ‘good’ category if your credit score is in this range.
That means you’ll qualify for all types of mortgages and will be able to get better interest rates.
If your credit score is 740 and above:
You’re in a great position at this range to shop around for a great mortgage!
How You Can Repair Your Credit Quickly
As we mentioned above, Nerd Wallet has two excellent articles on rebuilding your credit and increasing your credit score by 100 points. Both link are above.
Meanwhile, here are some general tip for repairing your credit quickly:
- Write all of your income and expenses down on paper – so you know exactly how much money comes in and how much money goes out every week and every month.
- Start tracking all of your expenses, down to the penny, every day. You might be surprised how much money you’re spending on daily coffee and lunches out, for example.
- Create a budget and start sticking to it. How often have you started a budget only to let it go after a week or so? Now’s the time to create good budgeting habits.
- Take on a second job or additional stream of income. Now’s also not the time to let your pride get in the way and worry about what anyone thinks of you.
If you really want to repair your credit and become a homeowner soon – don’t be embarrassed to deliver pizza, work at a fast food restaurant, walk dogs, start a side business, or anything else you need to do to make it happen. - Get rid of your smallest debts as soon as you can. Taking care of these small ones right away helps you to start cleaning up your credit – and seeing the results.
- Double up on the big payments. Instead of going out for a fancy dinner and drinks every Saturday night, put that money towards a double payment on one of your debts.
- Sell some of your items you don’t need anymore. You can make some good money this way. Things like clothes, furniture, books, electronics, etc. can all add up to money you can put towards your debt.
- As Dave Ramsey says, live on ‘beans and rice’ for as long as you have to. You’d be surprised at how healthy you can eat on a very tight budget. Do most of your shopping on the outside aisles of the market. They’re where the most natural products usually are.
Small changes like this will not only help you get out of debt faster than you thought you could, they can also help you get healthier. - Save as much money as you can. If you’ve never gotten into the habit of saving before, now’s the time to start. Make it automatic every week.
Besides saving being an incredible habit to start, you’re going to need money for a down payment and closing costs when you buy a house. These are just two expenses that go along with purchasing a new home. - Get everyone involved. You don’t want to be giving it hell to get your credit score up and in the meantime, your spouse is still spending way too much. You both want to be on the same page. There’s nothing like working together on a big goal like this.
If you have kids, get them involved too. It’s a great experience for them to be a part of. Make it fun. Make games out of earning, saving, spending, and getting your credit score up. Have them get creative with things like vision boards, goal charts, budgets, work schedules, and reward systems for themselves.
We don’t believe kids are ever too young to learn good financial habits. And these are just great life skills, as well.
And lastly – celebrate small wins along the way!
These are just a few things you can do to get your credit score up. Your lender will have plenty of detailed tips and advice for you, as well. When you really focus in, educate yourself, and work hard at it – your new home will become a reality before you know it.
Enjoy!
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Stay tuned for more articles on all the ins and outs of homebuying.
If you’d like to ask me any questions, email me anytime at: paula@newhomebuyeracademy.com.
Or call: 774-287-5852.