Can I buy a house with bad credit?
If you have bad credit, qualifying for a mortgage is going to be difficult. In fact, lenders won’t even consider you if your score is below 620. Most lenders are looking for a score above 650, some closer to 680. People who have a 650-660 score are considered low risk, meaning they tend not to default on their loans; so lenders will generally agree to a mortgage. But, to protect themselves, they will charge more for interest. Even small differences in APRs could cost you thousands of dollars more over the life of the loan. So, it really does pay to have your credit in the best shape possible before buying a house.
Improving your credit report and score
Keep in mind that it’s not only your score that lenders will be looking at. They will also evaluate several factors on your credit report to determine your credit worthiness. Credit worthiness means your likelihood to pay back money lent to you.
Whether your credit score is too low to qualify for a mortgage or you simply want to qualify for a better interest rate, there are several things you can do to improve your credit report and score.
The basic principles behind good credit are: pay your bills on time, keep account balances low, and take out new credit only when necessary. Unfortunately, these principles are difficult to follow and your credit scores take a hit when you don’t. There are steps you can take to help repair the damage. It’s important to note that raising your score is a bit like losing weight: It takes time and there is no quick fix. In fact, quick-fix efforts can backfire. The best advice is to manage credit responsibly over time. You need to understand what your credit is like now and what is influencing your score today. The following guidelines can help improve the different areas of your credit report; the more of them you adhere to, the better your score.
Payment History 35%
- Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score. Even one 30-day late pay can lower your score by 100 points.
- If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
- Be aware that paying off a collection account will not remove it from your credit report. Before you pay off a collection account, get the collection company to agree, in writing, that they will remove the negative listing on your report upon receiving payment. Although not as negative as an “unpaid collection”, a “paid collection” is still negative and will stay on your report for seven years.
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won’t improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.
Amounts Owed 30%
- Pay off debt. The most effective way to improve your score in this area is by paying down your revolving credit.
- Keep balances low on credit cards and other “revolving credit”. High outstanding debt can affect a score. A good rule of thumb is to keep your balance at less than 50% of your limit; even better, try to maintain 20%-30% of your limit.
- Transfer Balances. If you have a card that is close to being maxed out, transfer the balance to other cards to even out the usage or spread your charges out between a few cards. Try to get the usage on all of them at 20%-30%. That’s a much better scenario than having most of your accounts at 0% and one or two at 80%. You’re not spending less, you are just shifting it around to different cards.
- Don’t close unused credit cards as a short-term strategy to raise your score. Closing unused accounts without paying down your debt changes your utilization ratio, which is the amount of your total debt divided by your total available credit. Your score will drop because it appears that you are closer to maxing out your accounts. Consider that one-third of your score is based on how much of the credit available to you is actually getting used. Cancelling credit cards will automatically decrease the amount of credit you have available. You don’t have to use the cards, just tuck them away until your score is back on track.
- Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
This approach could backfire and actually lower score. Every time you apply for a loan or other type of credit, the creditor pulls your credit report. This is called a hard inquiry. Hard inquiries negatively effect your score.
Length of Credit History 15%
- If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
- Keep old accounts open. If you want to close accounts, make sure they aren’t the ones that give you the longest history. It doesn’t matter what the interest rate is, you want to keep your oldest accounts open.
Types of Credit 10%
- Apply for and open new credit accounts only as needed. Don’t open accounts just to have a better credit mix – it probably won’t raise your score.
- Have credit cards – but manage them responsibly. In general, having credit cards and installment loans (and making timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
- Note that closing an account doesn’t make it go away. A closed account will still show up on your credit report, and may be considered by the score.
New Credit 10%
- Do your rate shopping for a given loan within a focused period of time. FICO® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
- Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off consistently on time will raise your score in the long term.
- Note that it’s OK to request and check your own credit report. This won’t affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.