Bad Credit Score: How Soon Can You Secure A Mortgage Loan?

There’s a good reason why you need to be mindful of your spending habits. While occasional splurge is OK, not keeping track of your expenses and giving more importance to your wants than needs can wreak havoc on your finances. If you’re planning to secure a home or mortgage loan, may as well save up for the future or at least, take good care of your credit score.

How important is a good credit score? In the United States, it is a crucial determining factor in getting a mortgage. If you have bad credit, getting a loan can be a challenge. Instead of having a smooth journey into buying a home, the road can get steeper and steeper. There are practices to follow to raise your credit just in time to buy a house.

Getting a loan with bad credit

Understand your credit score

You will never know the importance of a good credit score unless you know exactly what it is. A credit score refers to the three-digit number which indicates your level of risk based on your financial history. Once you apply for a mortgage loan, the lender will check your credit score. The information appears on your credit report so if you have missed or late payments, this misstep will reflect on your credit score.

There are five aspects that can affect your credit score: length of history, payment history, credit mix, new credit, and debt-to-credit utilization.

Length of credit history: You can improve your credit score if you have a longer credit history. Lenders check the age of the applicant’s oldest account, the average age of all the accounts and the age of the newest account. Even if you have accounts with zero balances, it is still essential to keep all of them open.

Payment history: Making timely payments should be a habit because late payments can also impact your score. Delinquent payments of up to 30 days can cause your credit score to drop by as much as 110 points.

Credit mix: Having various types of credit accounts can help your score. These credit accounts may include installment loans, car loans, mortgage loans, credit cards, and retail accounts.

New credit: Avoid opening multiple accounts or applying for a new credit account as this can reduce your score by five points. This action can also result in lowering the average age of your credit account, which impacts the length of your credit history.

Debt-to-credit utilization ratio: This aspect refers to the amount of debt on your credit cards divided by your credit limit based on the sum of your credit card accounts. Prevent damaging your credit score by keeping the ratio around 30%. You can do this by avoiding maxing out your credit card every month.

It is important to note that your report may not show the actual credit score. You might need to get that separately.

What should be your ideal credit score?

Although 850 is the ideal credit score, only about 0.5% of consumers can attain this number based on a report from Fair Isaac Corporation. You are on the right track if your score is over 740. This can qualify you mortgages with best interest rates.

For scores that are in the 700s, you can still qualify for loans with reasonable interest rate. More often than not, lenders are looking for conventional loan applications with a minimum credit score of 620. However, if you want a decent interest rate, you should aim for a 660 credit score and steer clear of applying for additional loans to maintain your score.

Establishing a credit history

With raising your credit score, understanding the importance of the length of your credit history is also essential. There are many ways that you can qualify for a mortgage if you have not established credit at the age of 20.

Building your credit history is necessary for making yourself credible. So long as you have a good track record by paying debts in a timely manner and ensuring that you are not falling behind bills payments, these are great indicators that you are a responsible credit user. You can also build a credit history by taking out a credit-building loan.

Explore your options

There are various types of mortgages that can assist individuals who have lower credit scores apply for a home loan. Federal Housing Administration (FHA) for instance, provide applicants with the lowest credit score requirements. This is usually around 580 to qualify for 3.5% downpayment.

Ways to boost your credit score before securing a home loan

While a lower credit score can give you a hard time applying for a mortgage, it does not mean there is no other way to address your financial habits. If you intend to buy a home, now is the time to improve your credit.

  • Ensure timely bills payment-Paying your bills on time is the easiest technique to improve your score. You can start by creating a budget that works for you as part of changing your spending habits. You can also talk to a financial planner to design a budget that will keep your finances intact.
  • Get rid of credit card debt-A debt-to-credit utilization ratio, as a rule of thumb, should not be over 30%. Raise your credit score b paying down existing debt. You can also consider requesting a credit line from your card issuer as this can also lower your debt-to-credit utilization ratio. You can submit your request online or make a phone call.

Check credit report for errors

Make it a habit to secure a free copy of your credit report once every 12 months so you can review it for errors. Your chances of getting your mortgage loan approved may be slim due to errors on your credit report. The bank might have mixed up your accounts or someone shares the same name as you. By checking your report for any errors, you will be able to eliminate any inconveniences associated with having a low credit score due to inaccurate information.

Getting rid of negative marks from your credit report

If there are no errors and you are the one responsible for your low credit score due to a missed payment, you need to call your creditor and request for deletion. Keep in mind that this technique will not work if you have been known for being a habitual late payer. The request will only be granted if you’re a one-time offender. It is important that you are a loyal customer so you can make this request.

Once the creditor agrees to your request for deletion, a letter will be sent to the credit bureaus to request for the removal of the negative information from your credit report. It is your responsibility to collect all the documents like your letter of deletion or a new credit card statement, that will serve as proof that the changes have already been made. You also need to ask your mortgage lender to update your score, the process is known as a rapid rescore. It involves updating your score in a matter of days. This process is a huge help, especially when buying a home.

Seek help from a credit counseling agency

Another way that you can fix your credit score is by talking to a credit counselor. This is a good move if you find yourself falling behind on your credit card payments. The counselor will create a plan so you can make payments to your creditors without suffering from big interest rates. The debt-management company, on the other hand, will help you to negotiate with your creditors to lower the amount of money you owe. It is important to note that these companies also have large fees for such services. Assess your situation before seeking help from these companies.

Understand the interest rates you will obtain with your low credit score

Having a low credit score means that your options are limited. Before you apply for a mortgage loan, discuss your options with a lender. You also need to know the rate your credit score will qualify for. There are different factors that determine your interest rate. It does not only depend on your credit score. Being mindful of your spending habit can make the home buying process smoother and stress-free.

Cape Coral Mortgage, Inc.
3512 Del Prado Blvd. S Ste106
Cape Coral, Fl. 33904
(239) 540 5555