Trying to buy a home now with a bad credit score; or, rebuilding your credit first, then buying a home? MyBankTracker unwinds the dilemma.
If you buy a home now and you have bad credit, you will only qualify for a loan with a higher than normal interest rate.
That translates into costlier monthly payments. On the other hand, if wait to buy until you improve your credit score, you might miss out on today’s very low rates, which will also translate into costlier payments.
Here is some guidance to help you find your way out of this dilemma:
How bad is 'bad' in the eyes of lenders?
If your FICO score is below 700, you’re a candidate for a “subprime” loan. In other words, you represent a higher risk than normal of making late payments, missing payments altogether, or simply defaulting on your loan.
A score in the mid-600s may not be “bad” credit, but it will be low enough that lenders will ask you to pay more for a mortgage.
A score in the low 600s may disqualify you altogether from getting a loan from many lenders.
If your score is below 600, you can expect to pay much more for a mortgage, if you can qualify for any mortgage at all. Bad credit may cause lenders to decline your application as being too risky.
The Federal Housing Authority, or FHA as it’s popularly called, is willing to protect lenders from the risks. They offer to guarantee loans made to first-time home buyers with FICO scores as low as 500 with a 10 percent down payment, or 580 with a 3.5 percent down payment
Fannie Mae also recently announced they will guarantee loans to borrowers with credit as low as 620 and a 3 percent down payment (at least one person has to be a first-time home buyer).
Which bank will approve customers with low scores?
Lenders, however, have the right to set their own limits on acceptable scores. Right now, Wells Fargo is the only big bank that is open to approving customers with FICO scores as low as 600.
In today’s market, most banks are still declining people with a FICO score below 620. Many lenders will decline anyone with a score below 640 or even higher.
If you don’t know your credit score, MyBankTracker can show you how to get it for free from the three major credit reporting agencies.
What’s the cost of buying now with bad credit?
The worse your FICO score, the more you will be required to pay.
The actual cost depends on the lender. FICO, the credit score company, has a simple little calculator on its site that illustrates how much lenders generally change the interest rate based on your FICO score.
Raising your score even a few points can lower your mortgage payments and save you significant money.
For example, say you want to get a $100,000 mortgage and your score is between 620 and 639.
You might get a mortgage that costs $536 a month. If, however, you can raise your score to between 640 and 659, you might get a mortgage that costs $503 a month.
Improving your score just one more point, to 660, might qualify you for a mortgage at $478 a month. So, the difference between having a 639 score and a 660 score (a mere 21 points) can save you nearly $700 a year.
If you keep that loan for seven years before either refinancing or selling your home, you could save almost $4,900.
What’s the cost of waiting to buy until you improve your credit?
If interest rates rise, mortgages will be more expensive. Every one percent rise in the mortgage rate translates to roughly an extra $60 a month for every $100,000 financed.
That adds up: If you keep your mortgage for five years, you will pay an extra $3,600 over what you might pay if you got a mortgage now.
Here are the latest mortgage rates.
It’s important to realize, though, that this extra cost is more potential than actual.
Although everyone expects mortgage rates to rise from current levels, no one knows when that might begin or how high rates will go.
The general belief is that rates aren’t likely to rise in the near-term, so you have a great opportunity to improve your credit score and qualify for a lower rate mortgage than you might otherwise qualify for today.
Building better credit helps you both now and later
If you wait to buy a home until your score improves, the interest rate you can get might offset any rise in overall interest rates.
If, however, you’re sure you want to buy a home now, there are quite a few ways to quickly improve your credit score before you apply for a mortgage -- even within the next 60 to 90 days.
One way is to borrow from your 401(k) account to pay off half or more of what you owe on your credit cards.
You’re allowed to borrow from your 401(k) only if you use it as a down payment on your first home, so technically, you can’t use it to pay your credit card balances.
You can, however, pay down the balances with some of the cash you were planning to use for the down payment, then replace that cash with the borrowed 401(k) money. You will still have to repay the loan, but better to repay the amount to yourself than to the lender.
MyBankTracker has a number of articles with advice on how to improve your credit score. To start, read this article.
Here’s an article that explains what determines your credit score, so you can get an idea of which of your debts to target when aiming to improve your score.
The worse your credit score, the more expensive your mortgage will be. That’s guaranteed.
Waiting to buy a home may cost you more if rates go up in the meantime, but that’s not guaranteed.
Whether you decide to buy now or wait, your best option is to improve your credit score as soon as possible and save yourself thousands of dollars in the long run.
Who might lend you money now?
Many, but not all, lenders will consider someone with a credit score below 620 if the loan will be guaranteed by the FHA or others.
So, if you want a home now, contact some lenders in your area to see if you qualify for a guaranteed loan program, such as these:
Guaranteed Loans for Borrowers with Low Credit Scores
|Type||Score as low as:||Other information:|
|Fannie Mae-guaranteed||620||in 500s in some cases|