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Quora Article: I have a bad credit score. I want to own a home, but it is impossible to get a loan. What should I do?

Since I have done loans for people with 480 middle credit scores, I felt I could help with this. I know how disheartening it is to finally have the salary to afford to own a home but not the score.

Not all credit scores are created equal.

First of all, you say score, but you have 3 scores unless there is not enough credit, then the credit bureaus will say there is not enough data to determine a score, and you are left with less than 3.

So, if you were my client, I would start with credit data and see why the score is low and what quick fixes I can do to boost it.

Secondly, mortgage credit scores, and consumer credit scores, car loan scores are all different because the data making up your score is weighted differently for each credit use.

Thirdly in mortgage lending, we use the middle of the 3 scores, the lower of the 2 scores or the 1 score if both are blank, which is highly unlikely.

There are different loan programs for different credit scores. If you are over 740 mid score

FHA Loans

FHA loans are your best bet because FHA has no written rule on a minimum credit score. So they rely on their direct endorsement lenders who have underwriters who have been through training and have a CHUMS designation (kind of like a license to underwrite approve and put FHA on the hook for backing up – insuring that loan – the lender in making that loan).

Of course, for FHA, you only have to put 3.5% down payment and minimal costs, and this has the lowest rate.

As a former FHA underwriter, I can tell you the process of what we must do when you don’t fit in the traditional box to prove that we are still ok to give you an FHA loan. And defend it if ever in an FHA audit.

Let’s say you have a 480 mid score. They would look at why that score is so low and have you show yourself to be creditworthy in the last 2 years.

Alternative Credit

They would probably ask for alternative credit, meaning bills that are not on the credit report but hat are in your past credit history. Maybe you bought a used car and financed it through the small dealership, and that loan is not on your credit, then get out the proof of payment, and that will help. You should also send it in to the credit bureau to get credit for that loan’s on-time payments. Maybe you have put something on layaway or payment plan with a small shop that you could verify the contract and monthly payments on.

The other alternative credit items can be gym memberships, payments on personal loans, utility bills like gas, electric, cell, car insurance, rent, etc. There are ways to show that you know how to manage your debt. They usually want 3 or 4 of these.

The first thing we as underwriters look at (besides credit) is rent to mortgage increase. They call this payment shock. A lender will like you move If your rent is very close to the amount you would pay for PITI. If you don’t have a lot of consumer debt, then they like you as well since your dollars can focus on the mortgage obligation and upkeep of the home.

The last factor that pertains to the above is if you have a low debt to income ratio also abbreviated DTI, then that’s a plus to offset a lousy score.

Lastly, they will always want a letter from you explaining how this mess happened to you or how you created the mess and what you have changed to make sure it never happens again.

So yes, you definitely could get a loan at least here in the US, and it will be from a small and nimble company that knows how to fund hard to do credit profiles or has the broker relationship with that mortgage lender who will do these. It’s not a big bank, definitely not a Credit union or in-house lender at the realty company who is already overwhelmed.

If you can’t get an FHA loan for some reason with 20% down with that low score, you can do what’s called an alternative loan program, and that rate would be around 6-7s.

The last option or maybe I should say the first is seller financing as they are more flexible on credit since they are not a bank but a regular person selling their home. This is popular in some parts of the country and not even heard of in others.

About Athena Paquette

If you have questions about how you can buy a home with bad credit, you can contact Athena Paquette Mortgage Consulting for more detailed information. As a mortgage broker, Athena has consulted many clients over the years with mortgage and home advice.