A bad credit score shouldn’t get in the way of getting a mortgage. Throughout the global pandemic, the real estate market experienced an unexpected boom. There was a drastic increase in the sale of properties, particularly single-family homes, to help homeowners cope with the challenges.
The pandemic caused people to migrate from high-density cities to low-density areas such as the suburbs. Mortgage rates hitting record-lows also played a huge factor in the real estate boom. While experts are predicting a rise in the coming months, homebuyers are capitalizing on this opportunity to buy homes and other properties.
Determine Credit History
The lending process has gone through some significant changes due to the current circumstances. Due to the threats of mass unemployment and economic decline, lenders have become pickier when choosing borrowers. The application alone is expected to last a few weeks longer compared to previous years.
An individual’s credit score helps lenders determine the ability of a borrower to pay back the money they borrowed. A high credit score, usually 750 and above, presents minimal problems for lenders, which meanss they will most likely be offered premium rates.
Credit scores that fall below 630 are generally considered “bad”, keeping a homebuyer from getting or even applying for a mortgage. Sometimes, different lenders will have a minimum credit score for various types of loans. Despite this, being near the minimum entails bigger down payments, higher interest rates, and more fees.
The Big Financial Picture
Most successful homebuyers usually have a credit score of 650 or higher. Approximately 15% of Americans have poor credit scores within the 500 to 599 range on an 850-point scale. Another 10% are considered to have fair credit that falls in the 600 to 649 range.
Despite the unfortunate reality of having bad credit, having a steady income and paying a significantly higher down payment will allow homeowners to get a mortgage. If an individual’s credit score drops below 500, it’s a guarantee that they’ll be rejected for any type of loan.
Working with mortgage broker services is the best solution for homebuyers with bad credit scores. Brokers usually have access to a wider range of mortgage products that will allow borrowers to choose a loan that’s appropriate to their situation. The most important element a homebuyer should consider when looking for a mortgage is to know their options.
Feasible Mortgage Options
Applying for government-backed loans proves to be the most viable route for getting a mortgage with bad credit. While some lenders will allow borrowers with bad credit to secure conventional loans, these will definitely pose problems for financial sustainability in the long-run.
Mortgages insured by a government agency will often help homebuyers secure more affordable financing despite their poor credit. Government-backed loans have more relaxed credit requirements and lower down payments compared with conventional mortgages. Here are the primary mortgage options for individuals with bad credit.
Federal Housing Administration
An individual can qualify for an FHA loan with a credit score as low as 500, which will demand a 10% down payment. A score of at least 580, on the other hand, will entail a down payment of 3.5%. There are also no minimum income requirements. Lenders, however, will still have to determine whether a borrower will have sufficient income to repay the loan.
Veterans Administration
This type of mortgage is considered to be the most generous since there’s no minimum credit score required. There’s also no down payment needed unless a home is appraised for less than what a homebuyer will pay for it. However, these loans are only available to eligible military service members, veterans, and surviving spouses of service members.
U.S. Department of Agriculture
USDA loans are made available to borrowers planning to buy a home in rural areas. Generally, Section 502 Direct Loans only guarantees loans to borrowers with low to moderate-incomes in an area with a population of less than 35,000. There is also no minimum credit score requirement, no down payment, and interest rates are usually below what other mortgages charge.
Now or Never
After more than a year into the global pandemic, the homebuying trend is expected to persist well into the coming months. For homebuyers with enough capacity, acquiring a new property shouldn’t be a problem. People with a poor financial picture, on the other hand, will prove to have a difficult time.
An individual’s credit score is critical when securing a loan. While they could spend months trying to improve their credit, interest rates are already expected to go up by then. Securing a loan now is the best route to take. In the end, there are still plenty of opportunities for homebuyers to get a mortgage despite their bad credit scores.