Securing a mortgage can be a daunting task, especially for those with less-than-stellar credit. A credit score is a pivotal element in mortgage approval, influencing not only the likelihood of obtaining a loan but also the terms and interest rates offered. While a high credit score can open doors to favorable mortgage options, a low score may present challenges, though not insurmountable ones. This article delves into the implications of bad credit on mortgage prospects and offers strategies for improving credit health.
Credit scores have undergone significant scrutiny in the wake of the mortgage industry's upheaval. A score that was once deemed high, such as in the low 700s, is now often categorized as average. Credit scores are calculated based on factors like payment history, types of credit, account longevity, and credit mix, including credit cards, mortgages, auto loans, student loans, and store accounts.
In the current lending climate, a score of 740 or above is typically required for the best mortgage conditions. Scores between 740 and 720 are considered good, while anything below may be labeled as poor credit. According to Experian, one of the three major credit bureaus, as of the second quarter of 2021, the average FICO® Score in the U.S. was 711, which falls into the good range. Experian
Obtaining a mortgage with bad credit is possible, but it often comes with higher interest rates, potentially 2-5% above those offered to borrowers with good credit. This can significantly increase the cost of a loan over its lifetime. Additionally, borrowers with poor credit may not qualify for traditional fixed-rate mortgages and might have to consider adjustable-rate mortgages (ARMs) with variable payments.
Improving a bad credit score requires diligence and patience. Timely bill payments are crucial for boosting your score. If you're unsure why your score is low or what your score is, obtaining credit reports from TransUnion, Experian, and Equifax is a necessary first step. Review these reports for inaccuracies and dispute any errors you find.
For legitimate negative items, reach out to creditors or collection agencies to negotiate payment plans or settlements. Always get any agreement in writing and adhere to the terms. Over time, these actions can help improve your credit score, making it easier and more cost-effective to secure a mortgage.
Kristie Lorette is a freelance writer and marketing consultant with expertise in personal finance. She edits The Mortgage & Credit Diva, a blog offering mortgage and personal finance guidance. Kristie's insights can be found at The Mortgage & Credit Diva or learn more about her services at Studio K Writing.
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