When you are stepping into your first home purchase, you may have a lot of questions about the home buying process. The home buying process is a tedious one, and whether it’s your first time buying or fifth time buying, you might have forgotten what the process entails.
Buying a home usually involves getting a mortgage. And believe it or not, lenders prefer lending money to people with a proven track record of making payments. To determine your ‘track record,’ lenders will pull your credit. If you have bad credit, the home buying process can be much more tedious. Before we jump into how you can make your dream of owning a home a reality, let’s talk basics.
What is a Credit Score?
Your credit score can mean the difference between being approved or denied for credit, and whether or not you’ll receive a high or low interest rate on that credit. Your credit score is a number based on your credit files, which will show your ‘creditworthiness.’
The most typical range for credit scores is 300 – 850. However, this will change among different credit bureaus.
What is calculated in my credit score?
Payment History (35%) – your account payment information, including any delinquencies- Amounts Owed (30%) – how much you owe on all of your accounts.
- Length of Credit History (15%) – how long ago you opened accounts and time since activity on the account(s).
- New Credit (10%) – your pursuit of new credit, meaning credit inquiries and the number of recently opened accounts.
- Types of Credit Used (10%) – the mix of accounts you have open (revolving or installment).
What is a “Good” Credit Score?
Typically, a credit score ranging from 690 – 720 is good. Refer to the ranges below:
- 300-629: Bad credit
- 630-689: Fair credit, also called “average credit”
- 690-719: Good credit
- 720 and up: Excellent credit
How to Buy a Home With Bad Credit
To provide you with accurate advice and information on how to buy your next home with bad credit, I interviewed one of our trusted lenders – Jeff Dobrzykowski, Senior Mortgage Banker with Direct Mortgage Loans (jdobz@directmortgageloans.com).
1. Have your credit checked.
The first step is to have your credit checked. You have to know where you stand, with your credit score, in order to improve it. It is a good idea to do this as soon as possible. If you plan to start looking for properties, have your credit checked 4 to 6 months before.
Your lender will pull your credit report and will go over it with you. You should look through every line on the credit report to ensure that everything is correct.
The next steps it to work on building and fixing your credit. You’ll have two options: (1) work with your lender to bring your credit up, or (2) work with an outsourced company to repair your credit. Working with your lender is free of charge, but if you work with the outsourced credit repair company, you will pay a fee.
2. Working with your lender to rebuild your credit score.
Your lender will run your credit through a ‘credit simulator,’ which will estimate how certain financial decisions can improve your credit score. It will estimate how many points your credit score will increase, and how long it will take, by making just one financial decision.
After evaluating your current credit situation, and running it through the credit simulator, your lender will constantly be in touch, ensuring that you’re taking the necessary steps to bring up your score. Once, the time frame estimated has ended, your lender will pull your credit again.
What If My Credit Score is Bad Due to Bankruptcy?
This is trickier, but it can be done. The first thing you need to do after the bankruptcy goes into effect is to reestablish credit. You can do this by getting a secured credit card.
What is a secured credit card?
A secured credit card requires a cash collateral deposit that becomes the credit line for that account. In other words, if you deposit $300 for the credit card, the card will have a $300 limit.
It pays to shop around. Some cards will require you to pay an application fee or an annual fee. These fees vary so make sure you read the fine print.
How much do I have to deposit?
The deposits will vary, but, typically, the minimum deposits are $300 or $500.
How long do I have to wait to qualify for an unsecured credit card?
The secured card issuer will want to retain you as a customer, so assuming you make your payments on time in the given time period, you should be qualified. It should typically take about 12 months.
*This is important: After you’ve established credit, make payments on time!
FHA Loans and Bad Credit
If you have bad credit, using an FHA loan (Federal Housing Administration) to buy a house can be a good option. FHA loans allow for lower down payments and lower minimum credit scores.
To view all loan products and their requirements, click here.
Maryland Homes in $100k – $200k price range:
Are you thinking of buying or selling a home, or have a friend or family member who is? Contact The Pivec Group today by calling 443-692-8800 or visiting our website! We look forward to hearing from you and helping you find YOUR dream home!
