If you have poor credit history, you do not have to assume that you cannot secure home financing. There are many ways that you can still get the financing you need either right away or in the near future after you make a few changes. While a negative credit history is often a hindrance for a new mortgage, it is not the nail in the coffin that everyone seems to think it is in today’s economy.
What is Poor Credit History?
First, let’s take a look at the difference between poor credit history and good credit history. Generally, good or great credit has a score of 740 or higher. Today, however, that is not a very common occurrence. Many people have credit scores that are well below the 740 threshold. As you move your way down the credit rating scale, you move from excellent ratings to good scores which are between 661 and 739. From there, you have credit scores that are fair, which means between 601 and 660. Finally, you have poor credit scores, which are scores between 501 and 600.
Qualifying the Reasons
Your credit history is just one piece of the puzzle for the lender when he looks at your application. While at first glance, it might seem like no one would approve you for a loan if your credit score is around 550, there are ways around it. First and foremost, you need a reason for the low credit score. The lender needs to see beyond a reasonable doubt that you did not knowingly let your finances fall apart. It has to be because of something that was outside of your control. A few examples include:
- Job loss that was not something you did intentionally to get fired
- Illness that prevented you from working
- Injury that prevented you from working
- Family emergency that interfered with your income
The lender needs to be able to understand your story and why your finances fell apart. He also needs to see that you were able to pick up the pieces and better your finances, even if your credit score has not caught up yet.
The Most Common Loan for Poor Credit History
You might think that subprime loans are the only option for people with poor credit history, but the reality of the situation is that FHA loans are the most popular loans for people in this category. The FHA is known for its lenience in qualifying for its programs, which is why many people, not just first-time homebuyers, turn to this program. You can qualify for an FHA loan with a score as low as 500; you just have to be able to put 10 percent down on the home rather than the standard 3.5 percent that the FHA requires.
Improving your Situation
There are certain things you can do to help make your loan application look less risky than it would at first glance when looking at your credit score. Most loan programs have a computer automated system that they use to approve and deny loan applications, but many lenders also offer manual underwriting for situations, such as these, where the credit score is low, but the applicant really is not as risky as he looks. Before you apply, you can do the following:
- Show a timely housing history over the last twelve months, even if you were renting. Showing that you are responsible and able to afford housing payments is a large piece of the qualifying puzzle.
- Save money for a down payment. The more money you have to put down on the home, the less risky you seem because you have “skin in the game” so to speak. For example, on an FHA loan with a credit score of 550, you need to have at least 10 percent to put down, but if you have more, it can only make your situation look better.
- Have an explanation for your poor credit history ready. Do not just assume the lender will figure things out – that is the last thing you want. Instead, have a letter of explanation ready that details everything that happened that caused your finances to fall apart as well as how you have picked yourself back up.
This is not to say that every lender will approve you for a new mortgage if you have a poor credit history, but many will be more likely. You also do not have to assume that you are doomed to pay high-interest rates and crazy closing costs. There are plenty of lenders that cater to borrowers with a low credit score, so make sure that you are applying with the right lenders and have the necessary proof to get yourself qualified for a new home loan.