If you’re considering buying a new home, then you know how important your credit history is. If you’re saddled with a low credit score, don’t fret. There are still ways to obtain a mortgage loan and become a homeowner.
With mortgage interest rates still at low levels, now’s a great time to buy. In order to qualify for a conventional loan, you’ll likely need a credit score of 620 or higher, according to the Home Buying Institute. Sometimes, the minimum is upward of 640. The better your credit score is, the lower your interest rate will be.
If your score doesn’t quite meet muster, there are some secondary strategies to consider:
- Make sure your credit report is accurate. You should review your credit report before you apply for a loan so there aren’t any surprises. If your credit number is lower than you think it should be, scrutinize the report line by line. If there are mistakes or inaccuracies, try to get them cleared up as quickly as possible. Under the Fair Credit Reporting Act, you are entitled to a free credit report each year from each of the three credit agencies: Equifax, Experian and TransUnion. Each report will show your addresses, employers, creditors, payment history, balances and credit limits.
- Increase your down payment. If you have a healthy stash of cash saved up, use it for your down payment. A bigger down payment means more equity in the house. This presents you as less of a risk for the lender.
- An unconventional loan. If you can’t get a conventional loan with your credit score, you might qualify for an FHA loan. This type of loan is insured under the Federal Housing Administration. Generally you need a credit score of 580 or better, but there can be some leeway if you have a reasonable explanation for your low credit score, such as illness.
- Work with a counselor. There are professionals who specialize in homeownership counseling. They can help you improve your credit score and assist in getting you a loan. The Consumer Financial Protection Bureau provides a list of agencies approved by the U.S. Department of Housing and Urban Development. Services are typically provided at low cost.
- Improve your credit. Sometimes the best option is simply to let some time pass and improve your credit score. You can do that by paying your bills on time, not making any major purchases, keeping balances as low as possible and communicating with your creditors to set up a payment plan if needed.
Once you get your credit squared away, the next step is prequalifying for a loan. After you go through the process, you’ll know you qualify for a loan, what the maximum loan amount will be and the interest rate for which you qualify.
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