Your SATs. Your grade point average. Your score on Minecraft. Poor scores haunt you for the rest of your life, and none is more haunting than a bad credit score. Bad credit can hurt your chances of being approved for loans, especially for mortgage applications.
But not all is lost because you could still work toward improving that poor score of yours.
From Bad to Good Credit Score
The first step here is to manage your expectations; improving your credit score will take time. It’s a slow build-up to going from a low of 300 to a decent 600 or over. So don’t rush your plans to shop for mortgage loan services and buy a dream home.
Much like good credit, bad credit doesn’t happen overnight. You end up with a low score because:
- You’ve missed payments over time
- You’ve applied for and opened many new accounts, and
- Your credit limit may be low and you use more than what’s allowed (i.e., you’re overextended).
In general, such factors influence your score whether on FICO or VantageScore, which are credit score models. Most lenders typically pull your score from FICO.
Go from poor to fair credit score by making your monthly payments on time. This covers your rent, utilities, student loans, and other loans. Payment history is critical to improving your score. So no matter how tempting it is to splurge on a vacation, pay your bills instead. For credit cards, you’re encouraged to pay in full and not just the minimum. This cuts your utilization rate, which has an impact on your score.
If making full credit card payments is impossible with your current finances, zero in on keeping the lowest balance possible.
Another way to get a handle on your credit score is to scrutinize your credit reports. Inaccuracies should be disputed. One in five people finds common errors, like:
- Wrong personal information
- Incorrect accounts due to identity theft
- Open accounts even when they’ve been closed
- The same debt was listed twice
- An account with the wrong balance or credit limit
Get them fixed so that you don’t have to exert too much effort to improve your credit score; the fix may mean you have a good enough score to get a mortgage.
The Different Types of Mortgage Loans
Some mortgage loans work for bad credit, but these loan programs will require a minimum credit score.
Federal Housing Administration (FHA) loans may be the lowest at 500. An FHA loan is designed for low-income borrowers, which explains the minimum score. But you’ll need to pay 10 percent of the down payment. If you’re not able to make the 10 percent, the FHA will still accept your application with a minimum down payment of 3.5 percent at a 580 credit score.
Another mortgage loan to explore on bad credit is a VA loan, set by the United States Department of Veteran’s Affairs. It doesn’t offer to finance but rather guarantees it; the loan you apply for will come from private lenders. Although a VA loan doesn’t require a minimum credit score, some lenders do. The benchmark is typically 620. If you qualify, it’s zero percent down payment.
Other mortgage loans to look into are USDA loans and programs from Fannie Mae and Freddie Mac.
The risky part about applying with a fair credit score (580 to 669 under FICO) is the interest rate. A low credit score would mean high-interest rates for mortgage loans.
Yes, you can get a loan on bad credit. But then you could struggle with the monthly payments if the interest rate cuts into your budget. A good strategy for owning your dream home may be to wait and build your score until it’s deemed good (670 to 739) or very good (740 to 799).