Originally posted onto WalletPath.com 6/8/16.
Let’s face it, not everyone can have perfect credit. Everyone has a differing situation that lead them to having the specific credit score number that they do, and sometimes no matter how hard they try, their situation just makes it harder and harder to turn it around. Sometimes a low score is the result of irresponsible spending, and sometimes you’ve just had a streak of bad luck that has landed you in debt longer than you ever planned to be. Inescapable low credit scores lead to loan application disapprovals, much larger down payments, and even higher interest rates. With all this negativity, is it even possible to one day purchase your own house through a loan?
Luckily, the times of strict and faceless credit checks are no more, and lenders look at much more than just your number on the FICO scale. This asking of questions beyond “What’s your credit score?” is your ticket into getting approved for that home loan, and below are more tips that can further advance your chances of getting approved for a home loan, even with your low credit score.
Don’t let fear keep you from applying.
Before we even try to apply for a home loan, the looming feeling that comes with having a low credit score follows you around, and convinces you that you shouldn’t even bother wasting the lender’s time with your application. Your score is low already, and might even go lower when he checks it, so why bother? Right?
Your fear of an automatic “denied” stamp being slapped across the top of your application is helpful in theory because it means you are aware of your situation, but having it entirely cripple your motivation to try is a problem. Yes, there will be some lenders that will still stick solely to the FICO score, but there are an increasing number of home loan lenders out there that are looking to give approval to individual with low credit. Why? Because they understand, or at least, they are willing to be understanding of your situation. It is this willingness to look a little bit past the numbers and hear out your situation that is what will grant your home loan approval by them.
So shop around, ask around, and do your homework to track down and find these kinds of empathetic lenders who are willing to listen.
Escape the danger zone.
When it comes to the numbers, the FICO score is divided up into tiers, and depending on where you fall in which tier, the likelier you will automatically be approved for a home loan. The scale typically goes from 300 all the way up to 850, and the ranges inside along with their respective labels are:
300 – 500: Bad
501 – 600: Poor
601 – 660: Fair
661 – 739: Good
740 – +850: Excellent
So on this scale, you want to be above the danger zone (a zone typically colored in yellowish to red on an illustrated scale). This danger zone is anything below the range of “Fair”, so you want your credit score to be at least above 601 to be able to just have a hopeful conversation with any lender. If not, you may be denied right off the bat without even being given a chance to explain why you have the number that you do.
Lenders are more inclined to listen.
Your credit score is a meter that does nothing more than evaluate how much of a risk you are financially. It does not take into consideration your income, nor does it take into consideration your personality or your good deeds or anything outside of your financial obligations. So if your score is insomnia-inducingly low, don’t take it personally. It is just a gauge to tell lenders how likely you are to repay loans and repay issued credits.
As we mentioned early, lenders are now lending their ears (see what I did there?) to listen to your stories and hear why you have the score that you do, because many times, it’s not that the score owner is flat-out irresponsible, it may just be that you got laid off in the past year, and that is the reason that your credit score dropped off a cliff. Perhaps you have student loans that are continuing to increase in interest and have yet to be paid off is why your credit score is suffering, or you had a medical emergency that gave way to a large bill that is still not payed off is the culprit… whatever the reason, lenders are now willing to judge based off of more than just your score to grant you approval for a loan. So have your story prepared when you go in person to apply for a home loan with bad credit.
The FHA Loan and you.
If you do have low credit, and are having a difficult time finding a lender who will hear out your story, then you may consider applying for an FHA Loan (Federal Housing Administration). This federally insured loan is designed for individuals with bad credit to gain approval for a home loan because rather than the banks taking a risk on you, they take their cue from the government, leaving you with an approved home loan and them with insurance on you provided by the government. To qualify for this type of loan, you still need to have a credit score north of 500 and have enough to put down at least 10% of a down payment for the home you are looking to own.
Bring evidence of past financial responsibility.
If you are still having a difficult time convincing a lender that your credit score is nothing more than a recent financial hiccup, give them some hard evidence that you are worth issuing a loan to, and that you are trust worthy and have been in the past.
Provide them with bank statements showing you paid credit cards in full and on time for an entire year straight, or past rent payments on a house or car purchase that you also made on time and in-full for a year straight. Giving them hard evidence past your official score will help the lender make up their mind in your favor, as hard evidence is pretty hard to ignore.
You are just trying to convince them that you can be financially responsible, and nothing more than that. So if you plan on bringing them more evidence that you are responsible, and that evidence is more than just bank statements showing your past on-time payments, you best leave the extra pieces of proof at home: Extra pieces of unnecessary proof include your boy/girl scout patches, the child you used to baby sit for when you were in high school, and your mother. Although these are great to paint the picture that you are in fact a responsible human being, they just aren’t necessary to get approval for a home loan from a money lender.
Find a lender who is willing to listen and hear your case as to why you have such low credit, and provide proof of past upstanding financial responsibility, and you just may find yourself approved for a brand new home loan, even with your bad credit.