Most borrowers start with a credit limit ranging from $200-$1000 by the time they are 21, they are hit with a pretty high rate for that startup credit card around 16% rate or higher. Between credit cards and student loans, most borrowers are not aware of how credit even works. When lenders say how credit works it’s not so much how do you obtain a line of credit but how do you get the golden credit score; by keeping active good standing credit.
In the US, Over 35% of student loans and first credit cards suffer from a late payment within 36 months! What that means is 35% of borrowers in America are off to a so called “bad start” with credit because of our first type of loan we chose and missing a payment.
When reviewing someone’s credit to approve them for a home loan most people believe your rental, car payment, and credit card history speak the loudest for what a lender is looking for. The answer is a actually NO!
Most big banks and lenders won’t tell you that your credit is not as equally as important as your source/length of income, total down payment, and assets for the borrower. Most banks and lenders sell their mortgages in pools within 5 years of closing so they do not lend below a 620, sometimes higher to prevent foreclosure in the pool of loans being sold so they are bigger on credit than anything. Banks are not a bad source for a mortgage but… most dont plan to hold your mortgage for a full 30 year term. Banks love short term loans such as car loans, personal loans, and business loans which are paid back normally within 5 years. Direct lenders who buy pools of loans and service them typically will lend below a 620 credit score.
So… buying a home with below a 620 credit score is possible? The answer is YES and everyday you wait, truthfully may cost you more by the day because rates are rising. You can buy a home today around 4%, which was never heard or thought of before the market crashed but again the LIBOR is moving. Most borrowers have the source for the down payment, steady income, but maybe a credit score of a 580 awaiting the 620 credit score to move forward on a purchase. To move your credit score 40 points can sometimes take 6 months or even longer! Rates adjust daily and move with the LIBOR so the rate today for a loan can easily adjust a half percent and end up costing you an extra 10,000-15,000 dollars in interest! Waiting can cost you more in interest to be paid, more to be paid for a home if prices are moving, and may cause you to miss your dream home.
Buying a home with down to a 550 credit score is possible with FHA, VA, and USDA programs depending on the lender. The first step is getting approved for a mortgage to make a purchase on a home. Whether you are at a 550 or a 750 credit score, buying a home and having a mortgage report monthly will increase your credit score. Once this mortgage begins to report your able eligible to refinance the loan 6 months after with a better credit score which will open the door to better rates. The key is understanding your credit and income to get approved to move forward and make the purchase today. So when does credit really become a factor in buying a home to a lender? The answer is when the borrower has 20% to put down with a 620 credit score compared to a 619 or below.
The why? because mortgage insurance is needed for any loan where the borrower has below a 620 credit score when buying a home, no matter the down payment amount, because of FHA. The big perk of the VA loan; mortgage insurance is never a requirement nor a down payment. Finding a lender who can offer those terms is the key and this is specific to veterans. salute.
For everyone else with a 580-680 credit score without 20% down the best loan option for a buyer is FHA because the cost of mortgage insurance. Once you have 3.5% to put down, steady income, and a score of 580 – you are ready to apply. If you are below a 580, don’t panic, just be prepared to put 10% down.
When buying a home with less than a 620 credit score you are always eligible for the same rates as a person with a 720 score because it’s a federal not private loan with FHA or VA
So why wait? And getting prepared to reach out to a lender or broker is always the easy part. No matter the program you apply for it’s the same documents to prepare for the lender. The easiest way to remember what to gather is the 222 System from My Loan Is Your Loan:
2 years of W2s from all employers
2 years of tax returns all pages
2 pay stubs showing 30 days of income
2 complete bank statements all pages
Whether you have perfect credit or less than perfect credit working with a mortgage broker is always the way to go rather than directly with a bank, if you care about your rate. Brokers deal with wholesale lending compared to retail lending so rates can be better priced whether buying or refinancing. The same thing goes for when shopping for homeowners insurance, insurance brokers will be able to get you a 20-30% better deal when working with Statefarm, Geico or Nationwide. Go with the expertise of someone who purchases a home everyday, to know the ins and outs, and form a relationship with a broker for the financing of your next home.