Credit is a very important part of the real estate world, and with so many people still trying to rebuild their credit it is no wonder why many people are asking the question: “Can I buy a home with poor credit?” It is a bit of a polarized issue thanks to the many different rules, regulations, and players that are involved in the mortgage game. So, unfortunately, we can’t give you a solid yes or no on the subject. We can, however, tell you what we know and feel about the general atmosphere of home loans in the Boise area. Nothing we say here should be taken as a guarantee as the real choice comes down to your lender. So, today, we are going to go through the basics of the credit score, why it is such a vital part of the home buying process, and then move into ideas that will increase your chances of eventually get yourself into a home despite your credit.
So, let’s take a moment to step back from the problem at hand to get a better view of the entire situation. You see, your credit is an indicator to banks, credit unions, and lenders how responsible you are with your finances. Since they are taking a gamble on you, they want to know how much they can afford to trust you with.
The Credit Score
Your credit score is a number that you are assigned that is calculated by your past behaviors. It will lie somewhere on a scale between 300 and 850 and the higher the score, the better. It is a lot like when you get a grade in a class. Your grade is a reflection of your academic performance. Your credit score, on the other hand, is a measure of your financial performance. (Performance meaning if you pay your bills, card payments, and loan payments on time).
Usually, you want to be over 700, that is a good place to be. However, when we talk about poor credit we mean anything from 300 to 600 or so (depending on the economic climate).
The Lender’s Perspective
We sort of touched on this earlier, but the reason credit scores were invented was to help lenders (meaning banks, credit unions, and mortgage companies) make more well-informed decisions on who to lend to a how much to lend them. For instance, if someone comes in asking for a loan with an 800+ credit score, the lender will most likely be willing to lend them quite a lot of money for a good price (interest). This is because the high credit score shows they are really good about paying people back. However, if someone with the exact same yearly income but with a credit score of 600 or below came in asking for a loan, the lender would probably not want to loan them as much— if anything at all—for fear that it might not get paid back.
So, that is why it is so important to have a good credit score when it comes to buying a home. But let’s talk about what buying a home with poor credit looks like.
Is it possible to buy a home with a poor credit score?
Well, the short answer is yes, it is possible However, the decision truly comes down to the lending agency you decide to work with. Sometimes they will have special programs for people who have poor credit, sometimes they will be more lenient with their rules depending on your situation, sometimes they may even be able to coach you until you have an acceptable credit score. It really all depends on who you are working with.
What we suggest is that you schedule an appointment to talk to the financial institution you usually deal with. Once there, express your concerns to them. Tell them that you know you have a low credit score and that you are trying to get into a house some time soon. They can then take a look at your current financial situation and give you specific feedback. If they aren’t willing to work with you or coach you in any capacity, we suggest talking with a mortgage company or another financial institution. Once you have found someone who has low interest rates who is willing to work with you or at least coach you through, do what you can to follow their advice.
Tips and tricks to help raise your credit score
While your immediate priority will most likely be securing a place to live, your long term goal should be to raise your credit score so that the next time you want to buy a home, you can do it without as much hassle. So, let’s talk about raising your credit score.
Since your credit score is a product of your financial performance, everything you do to raise it will come down to showing that you are responsible with your money. This means you are paying all your bills on time, you are paying off your debts, and you are saving money— so, these are the first steps you should be concerned with. Get your finances in order so you are paying all your monthly bills, you are making payments to pay off your debts, and you are putting away a little money each month.
The next step is to strategically utilize your existing lines of credit. So, if you have a credit card you can do a few different things with it. The strategy we like the most is called the shopping strategy and it goes like this:
When you do your normal grocery shopping every month, purchase everything with your credit card instead of a debit card or check or cash. Then, once the charge is put on your account, you pay it off immediately with the money you would have normally used. This will show that you are actively borrowing and paying back money to the bank, thus making you look responsible. The beauty of this strategy is that you only have to change up two parts of your normal shopping routine: using the credit card instead of some other method of purchase and making sure to pay off the charge immediately after it is applied.
NOTE: Be sure not to spend more than the money you have in your bank account! If you put more on the credit card than you have in cash or your checking account, you will not be able to pay it all off and you will start accumulating more debt as you are trying to fix your credit. So, stick to a budget and don’t spend more than you have.
Well, it looks as though we are out of time for today. At this point, you are ready to find a lender to work with who can help you make your home buying dreams come true. Be sure to check in later for more information about home buying and how you can buy a home here in the Treasure Valley, even with poor credit.