Imagine that you’ve finally found the home you’ve been looking for, but a nagging question surfaces: What’s my credit score? There is so much fear surrounding credit that many choose to ignore their score until the last possible second. Unfortunately, those three little numbers do wield a lot of power.
When it comes to big purchases, credit scores are used to decide whether or not a buyer is financially responsible enough to support their purchase. And when you’re ready to buy a house, for example, that score becomes a strong determinant for loan approval.
This immediately strikes fear in many aspiring homeowners with low credit. But not to worry. Here at Housso, we have compiled a list of alternatives for home financing with a low credit score.
What is Low Credit?
There’s a lot of confusion surrounding credit scores, especially when it comes to approval for a loan. In order to be accepted for a conventional loan, you must have a minimum score of 620. But even this will limit your possibilities.
Just think of it like this—the higher the score, the more open doors. In other words, the healthier your credit score, the more options you will be given by your mortgage lender. On the other hand, anything below 620 is considered low or poor credit. And that will significantly reduce your loan options.
Even if you have low or poor credit, you may still have the option to apply for an FHA loan. An FHA loan is a mortgage that is backed by the government and insured by the Federal Housing Administration. The qualifications for an FHA loan are much less strict than a conventional loan.
However, applicants must be able to demonstrate proof of employment and a steady income. This type of loan also needs to be approved by a certified FHA lender and appraiser, among other requirements.
Honesty is Key
The smartest thing to do is be honest with your lender. Perhaps there are valid reasons that your credit score is so low. Some circumstances, like identity theft, are simply out of your hands. It’s worth discussing your options with your lender.
Conditions that no longer affect your financial stability may be considered and waived for your loan. It’s also worth the time to review your credit report for errors. Anything that can raise your score is worth the patience and effort of double checking.
Higher Interest Rates and Refinancing
There is the option to take a higher interest rate on your home, with the intention of refinancing later. Though this is never a guarantee, some owners find it possible to take a higher interest rate while they build up their credit score. Once they have reached an optimal score, they can apply to refinance their home at a lower interest rate.
A Big Down Payment
If your credit is low or you have too few lines of credit, you might consider a larger down payment. A hefty down payment is seen as a reasonable investment in a home. It signifies to a lender that you are serious about your purchase and that you are willing to put forth the extra cash to prove it.
Rent and Wait
Maybe you’re not ready to own your home—and that’s okay! Sometimes the smarter option is to simply rent your home until you are ready to own it. By building your credit, you’ll be able to demonstrate to a mortgage lender that you are not only financially reliable, but also dedicated to buying your home under the right circumstances.
Not the End of the World
Having a low credit score is not the end of the world. It might be a limiting factor now, but it can always be rebuilt. Whether you choose to explore your low-credit options, or you opt to strengthen your score, know that your dream to be a homeowner can still be a reality!
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