Securing a Home Loan With Less-Than-Perfect Credit
When it comes to fishing for a manageable home loan, many people may feel like they’re dead in the water. While low FICO credit scores (and shallow credit) can pose challenges for some borrowers, there is light at the end of the tunnel. Restrictions on mortgage approvals have loosened over the past few years as more and more lenders have turned to credit assessment based on the individual, rather than just a number. Nations Lending is one of these institutions.
At Nations Lending, we understand that even responsible borrowers can fall on bad times. Many factors go into determining what may have caused a dip in an individual’s credit rating, and we strive to take each of these factors into account so that we can offer credit-challenged borrowers the opportunity to own the home of their dreams. By taking the time to educate our borrowers on the home loan process, we know we are empowering them to turn their FICO scores around, thereby improving their odds of approval. With a little knowledge and a few simple tips, you too can begin the journey toward good credit and home loan approval.
Automated Versus Manual Underwriting
When assessing individuals for home loans, lenders will plug their information into an automated software program provided by Fannie Mae or Freddie Mac. If a lender so chooses, the individual can also be assessed by a loan officer based on that person’s history and judgement. This brand of more personal credit assessment is known as manual underwriting, and it can go a long way to helping those with credit issues receive a fair assessment.
How low is too low?
The first question many people want answered is, “How does my credit score rank in the eyes of lenders?” Credit scores fall within the range of 300-900 (the extreme ends of the good-versus-bad-credit spectrum). Here is a breakdown of what the process will look like for borrowers who are “on the line”:
- 650 or higher – Good credit; excellent odds of receiving approval without too much hassle
- 620-650 – Fair credit; good odds of approval, yet may need to provide additional documentation
- 580-620 – Challenged credit; borrowers in this range may be down, but they’re not out; the process may just take some additional steps
What are my options?
FHA Loans – Many people in the “challenged credit” range will find success through an FHA Loan. These are government-insured loans backed by the Federal Housing Administration. Even borrowers with credit scores as low as 580 can be approved for these loans without having to provide more than a 3.5% down payment. Because these loans are backed by the federal government, restrictions from lenders are less strict—in some cases, approval can even be seen when the individual has experienced foreclosure or bankruptcy.
VA Loans – These are loans that are only available to veterans and active military members—they’re a great option for borrowers, and if you think you may qualify for a VA loan, it’s definitely something you want to discuss with your lender. Also guaranteed by the federal government, these loans offer extremely competitive interest rates and require no credit check or income requirement. Beside the loosened qualification standards applied to these loans, they also require no down payment (which means borrowers can finance the total cost of their new home) and aren’t subject to private mortgage insurance payments (PMIs). An additional benefit here is that VA loans do not dole out penalties for prepayment—if you want to pay down additional sums on your loan each month, you are free to do so without fear that you’ll be hit on the back end.
Note: while VA loans are an excellent choice for those who qualify, be sure to discuss possible hidden fees (repairs, etc.) and loan limits with your lender.
What can I do to improve my chances of securing a loan?
People who may be riding the line between poor and fair credit may be wondering what they can do to put themselves in the best possible position for approval. Here are a few tips for increasing the odds that you’ll be closing on your new home in no time:
- Increase your down payment – Lenders are more willing to take a chance on someone who will back up their investment with additional income. Even a bump from 3.5% to 5% is helpful.
- Be sure to make payments on time for an entire year – Every payment you make (credit cards, online payments, etc.) is taken into account when you apply for a mortgage. Don’t give anyone a single reason to assume you’re not going to make payments on time.
- Stay away from opening many lines of credit in a small window of time – Yes, shallow credit can be a worry for some borrowers, but account age is just as important as credit depth when it comes to establishing a good score. New lines of credit can actually bring a score down by 10 points each.
- Stay realistic – Understand your limits when determining what monthly payments you can actually afford, and apply for a loan well within your budget.
- Keep your search for the perfect home loan short – Checking your credit score can reduce it in some cases, but this can take about a month to occur. If you shop around for too long, the result may be a lower credit score by the time you choose.
Note: Closing a bad account in the hopes of keeping it from lenders will not work. All of your accounts are part of your history, and will show up in your credit check no matter what.
What about improving my credit score?
If you’re wondering what you need to do to see a 650 next to your name, there’s good news. In addition to the steps you’re going to take above, there are many things you can do to improve your FICO score in just one year:
- Check your report – In your pursuit to improve your credit, it’s a good idea to understand what lenders will be assessing and to check for any errors or fraudulent marks on your credit history. AnnualCreditReport.com will provide your Experian, Equifax and Trans Union reports for free. Another great resource for quickly checking your score is the ever popular CreditKarma.com.
- Make payment on time – Yes, this might sound repetitive, but it is the single most important thing you can do to establish yourself as a high-quality, low-risk borrower in the eyes of lenders.
- Keep balances low – Regardless of the number of credit lines you have established, make sure the balances are low throughout the year. Ideally, you’ll want your balances fully paid at the time of your assessment.
- Apply for a credit card – If you don’t have an established line of credit, get one credit card set up under your name, and use it to purchase something small each month that you’ll be able to pay for in full each payment cycle without fail. Establishing credit is almost more important than maintaining excellent credit.
What are your biggest concerns when considering applying for a home loan? Please feel free to ask questions and leave your comments below.