Many people who look for home loans these days have a vague sense of the importance of a FICO credit score in determining loan eligibility. It is true, that your credit history can weigh big in your ability to borrow the money you will need to finance the purchase of a new home. However, bad credit comes in more than one flavor. Therefore, it is important to understand exactly what qualifications are needed to achieve a sufficient mortgage loan.
Defining Bad Credit
Your FICO credit score is a three-digit number between 800 and 300. It is determined by the Fair Isaac Corp. based on a complex formula. That formula takes several factors into account before producing your credit score number. Among the points assessed by a FICO credit score is your current repayment of existing loans and your history of late payments and defaults. Having a severe issue like bankruptcy or foreclosure on your record is especially detrimental to your ultimate score and they are the two issues most likely to create bad credit.
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Home loans are given to people with all sorts of credit scores, however. There are simply additional factors and requirements that you will need to meet in order to qualify for the mortgage loan that you want.
FICO Scores and Mortgage Loans
When assessing a borrower based on his credit, lenders draw three distinct groups. The first is those with the best credit scores, basically anything above 650. As long as you have sufficient income, people with these high scores will qualify for a mortgage without a problem. Many lenders will even consider these individuals for 100% financing, eliminating the need for a down payment.
The next group (those whose FICO credit scores are between 600 and 650) will also likely qualify for a home loan with sufficient income. They may not be able to get 100% financing, however, unless they utilize the services of a subprime lender.
Those whose credit falls below 600 are in a different world altogether when it comes to home loan qualification. The option of receiving 100% financing is pretty much off the table for these individuals and subprime lenders are also a must. Basically, your only chance of finding a home loan with low credit scores that are below 600 is through lenders who specialize in bad credit home loans and saving up a large down payment.
Making Changes to Get a Home
If you are one of the many individuals who fall into the third category of lenders, all hope is not lost. Bad credit can be a barrier to getting a mortgage, but it is not impassable. There are distinct changes that you can make in order to increase your chances of getting a home loan in the near future. These changes are:
- Refinancing existing loans in order to consolidate payments and eliminate multiple debtors.
- Taking time to rebuild your credit after foreclosure or bankruptcy (basically, you need to wait 2-3 years before seeking another home loan).
- Budgeting carefully each month in order to save up for a large down payment (if you can present 10-20% you will be far more likely to qualify).
- Seeking credit counseling to help improve your FICO credit score.
There are plenty of options for those with bad credit that can make finding a home loan simpler and more hassle-free. Remember that time is your best friend when it comes to recovery following financial meltdowns such as bankruptcy and foreclosure, and that working with lenders who specialize in bad credit mortgage loans give you the best chance of receiving the financing you need.
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