Credit score is the ghost of home acquisition for many homebuyers who are seeking to finance their home purchase through a mortgage. Lenders use a borrower’s credit score to determine how risky an individual is and hence determine their eligibility for the loan. Credit score is calculated using an individual’s length of credit history, payment history, debt-to-credit utilization ratio, credit mix, and new credit. Current credit score rankings entail:
850 = Perfect credit
720+ = Excellent credit
680-719 = Good credit
620-679 = Fair credit
580-619 = Poor credit
579 and lower = Bad credit
People with a credit score above 620 have more opportunities in terms of the number of financial institutions willing to provide them with loans and better interest negotiating power. Worry not if your credit score is bad or poor since the financial industry offers you a few chances to bag that dream luxury condo Seattle.
Pay higher interest
Lenders offer mortgages to people with bad credit but at a higher interest than those offered to people with good credit. For example, a person with good credit may easily get a 30 year mortgage at an interest of 3.77% while one with bad credit will get the same loan at 5%. A high interest rate results in high monthly payments for the homebuyer but this is a sensible price to pay especially if your current income enables you to do so. Lenders charge people with bad credit more since such people have a recorded history of making late payments or defaulting payments. It is a means of financial protection for the lender in case your old habits come back.
Apply for FHA loan
The Federal Housing Administration (FHA) offers loans to homebuyers who need minimal requirements to qualify in comparison to traditional lending institutions. FHA loans with a 3.5% down payment are accessible to people with bad credit scores of at least 580. A credit score lower than 580 will attract a higher down payment requirement of about 10% of the total price of the home. Of notable interest is that FHA loans come with a price tag of mortgage insurance, which increases the monthly payments that one has to make.
Pay a large down payment
Another option of combating bad credit when buying a home is to put up a large down payment. To achieve this, you should create a financial plan that allows you to save for a couple of months or a few years before settling down to buy a house. Lenders will accommodate a borrower with bad credit but is willing to pay a large down payment for a home since this reduces the risk they undertake when they provide the loan. A down payment of at least 20% and/or more may be sufficient to convince the lender of your ability and willingness to pay the loan. This factor may also help you avoid mortgage insurance.
You will need to be pre-approved for a mortgage when looking at homes for sale Beacon Hill Seattle and other neighborhoods in order to know the budget to work with when house hunting with our real estate agents.