Too often, people with marginal or bad credit don’t even allow themselves to look at homes to buy for fear they won’t be approved for a mortgage loan. According to realtor.com, approximately 33% of potential buyers with bad credit simply throw up their hands in hopelessness; 45% decide to delay buying while they “work on” improving their credit score for a year or two; 20% believe they’ll have to wait about 5 years before they can even think of buying a house.
Sure, it’s better to have a good track record of paying off past debts (credit cards, student loans, etc.) so that a potential buyer’s credit score reflects that good track record but there definitely are options out there. And who better than real estate agents to inform, educate, and enlighten potential buyers with bad credit about these options.
Agents can let potential buyers know first off that anyone is entitled to a free copy of their credit history every year from Equifax, Experian or Trans Union. They can also request a free copy of their credit history from AnnualCreditReport.com. Potential buyers will, however, have to pay a fee to one of these credit bureaus to get an actual credit score. They may be able to get a credit score for free from Credit.com, CreditKain, or CreditSesame but these are not full fledged credit bureaus.
Credit scores from 300-850 are based on a combination of payment history, debts owed, length of credit history, they type of credit and the number of credits applications on file. A score of 760 and above is a great score and will likely render the score’s applicant the best interest rates. A score of 700-759 is considered good; a score of 650-699 is considered fair; and a score of 650 or less is considered poor.
The first option an agent may suggest to a potential buyer is an FHA (Federal Housing Authority) loan that was created by the government for low/moderate income people with subpar credit, 580 and up. FHA loans allow low down payments, often as low as 3.5%. The downside is that FHA loans require an upfront mortgage premium since these are government loan instruments. (Currently the fee is 1.75% or $3,250. on a $300.000. home.) Also required is annual mortgage insurance currently at 0.85% or $2,550./year on a $300.000. home
The second option is a VA loan (U.S. Department of Veteran’s Affairs) designed specifically for active and/or retired military. VA loans are acceptable for people with credit scores below 620. No down payment is required. No mortgage insurance premiums are required. This is a no-brainer for military personnel.
The third option is a 15 year fixed rate loan. This option is great for people who have had bad credit in the past but who currently and will have solid credit in the future such as people who were students with student loan debt and are now becoming doctors, attorneys, engineers, etc. Most conventional lenders require a credit score of 620 with this option.
The fourth option requires a bigger down payment, approximately 24-30% rather than the usual 20% down payment. “The more you put down, the more you minimize risk to the lender,” says Todd Shein, mortgage lender and COO with New American Finance in Gaithersburg, Maryland. Even a larger down payment, however, may not reduce any negative impact on a loan’s interest rate.