A credit score is a quantifiable basis of one’s creditworthiness. It is a comprehensive measurement of the factors that identify one’s ability to manage their available credit by repaying debt obligations in a timely manner.
One’s credit score is a living, breathing algorithmic measurement that adeptly ‘quantifies’ a consumer’s creditworthiness, based upon a number of defined factors. One’s credit history (and thus, their credit score) is, however, a reliable, time-tested way to anticipate the financial integrity of a mortgage or loan applicant.
While an exceptional credit score (800+) meets lending criteria across the board, a less-than-perfect credit score, (a.k.a., bad credit) often precludes a borrower from receiving a mortgage loan approval.
Traditionally, a bad credit score hovered at or below 630; however, many mortgage lenders now offer mortgage programs specifically designed for off-credit borrowers who would otherwise be qualified for a mortgage. These home loans for bad credit are for borrowers with scores of 580, or above.
THE 3 C’S OF CREDIT
There are three fundamental factors derived from a credit score –
CHARACTER– the concept of character references one’s level of trustworthiness.
CAPITAL– the concept of capital references the way in which a lender can mitigate their risk by securing a loan with collateral — for mortgages; this would be the subject property.
CAPACITY– the concept of capacity references a borrower’s ability to meet their financial obligations.
The minimum credit score set forth by a lender for each mortgage product depends on the type of mortgage a borrower has chosen. The government-backed FHA, VA & USDA loans generally reduce underwriting standards when compared to more conventional mortgages offered by FNMA and FHLMC.
HOW DO HOME LOANS FOR BAD CREDIT WORK?
If one’s credit score sits near or at a lender’s minimum credit requirements, an underwriter could request that a borrower –
- Place a larger down payment than originally requested by the borrowers.
- Increase the interest rate to compensate for the elevated risk profile of the mortgagor.
- Request a borrower to increase origination fees to compensate for the high-risk mortgage transaction.
- Many other options can be requested at the underwriter’s discretion.
As such, a lender willing to approve a mortgage for your less-than-perfect-credit is likely to charge more than a traditional mortgage. However, a higher-cost mortgage not only provides an opportunity to obtain a mortgage (which may otherwise not be available), it sets forth the chance to use your new debt as a way to improve your credit score, simply by paying the debt, when due.
The best way to avoid what is often perceived as a penalty for bad credit is to raise your score before applying.
LEARN WAYS TO IMPROVE YOUR CREDIT SCORE TO AVOID HOME LOANS FOR BAD CREDIT
Using one’s credit with due care is the first step in reaching for a higher credit score. This includes–
- Paying obligations on time.
- Lowering debt levels.
- Maintaining acceptable levels of debt when compared to its credit limit, among others.
Remember, while information on a credit report is reported to remain visible for 7 years, the further back in time the credit transgression happened, the less impact it will have on your current credit score.
