These clients might need your help, guidance, and, above all, empathy.
Working alongside borrowers with “bad” credit can be tricky. They might be anxious, regretful, or scared when it comes to their loan options. Or they might be unsure whether they’ll qualify for a mortgage at all!
Either way, when a client with bad credit walks through the door, stellar mortgage loan originators (MLOs) jump into action. This could include ensuring they understand that bad credit isn’t the end of the world and clarifying their choices, whether that’s buying now, refinancing later, or taking some time to bump that score up.
To make this all a bit easier on you, we’ve compiled some common borrower questions related to bad credit and their answers below. Feel free to share this guide with clients as a jumping-off point. Maybe copy and paste into an email or create a social media campaign!
Either way, let’s dive in:
“Can I Buy a House with Bad Credit?”
First things first, clients should know that yes, they might be able to get a mortgage with bad credit. It might be more challenging or cost them more in the long run, but it’s certainly possible.
Keep in mind that lenders consider more than just credit scores when qualifying borrowers for a mortgage. They’ll also look at their income, employment history, debt-to-income ratio, and more. Credit is just one piece of the puzzle.
Basically, if they take one thing away from this list, let it be the fact that they can buy a house with bad credit.
“How Can I Check My Credit Score?”
Before borrowers get too anxious about their credit score, they’ll probably want to determine what it is, exactly. There are a couple of different ways they can check their score:
- MyFICO.com. This source is highly accurate and most often used by lenders. So, it’s likely a safe bet. They will need to purchase their score if they do use this tool, though.
- Credit reporting agencies. There are three major credit reporting agencies borrowers can refer to: Equifax, Experian, and TransUnion. They can purchase their credit score directly from each agency or get a free credit score once a year at AnnualCreditReport.com.
- Credit monitoring services. Clients can check in on their credit score periodically (and typically for free) with credit monitoring services. Some of the more popular options include Credit Karma and WalletHub.
- Their bank. Depending on the bank, clients may have access to free credit score monitoring. They’ll need to check with their individual provider to see if they offer this service.
“What Credit Score Is Needed to Buy a House?”
The minimum credit score needed will depend on the type of loan and the lender’s requirements. A good number to shoot for is often 620, but borrowers may be able to get a mortgage with a score as low as 500.
Of course, the higher the score the better. A credit score of 700 or more may significantly increase their options.
“What Are the Cons of Buying a House with Bad Credit?”
Lenders see credit scores as a record of past financial behavior. Then, they use it to help predict future behavior. To them, low credit can equal more risk. Basically, if a client missed a payment in the past, lenders worry there is a possibility they might also miss a payment in the future.
While we know that it’s much more complicated than that, many lenders have strict credit requirements. That means borrowers might need to jump through some extra hoops to borrow money.
This might include:
- Agreeing to a higher interest rate. Lenders often charge more in interest if they perceive a higher risk. That’s because they want to ensure they make their money back.
- Paying fees. Clients can’t forget expenses like closing costs, private mortgage insurance (if the down payment is less than 20%), and any other fees associated with the desired loan type.
“What Kind of Loan Can I Get with Bad Credit?”
Typically, borrowers with low credit do have options. Here are just a few solutions you can walk them through:
- FHA Loans: The Federal Housing Administration (FHA) usually has the lowest credit score requirement. Borrowers typically can qualify with a score as low as 500, but 580 or above would be best.
- VA Loans: There is technically no minimum credit score required when it comes to this option for eligible borrowers. Most lenders typically prefer a score of 580 or higher, though.
- Non-qualified mortgage: These loans are aimed at borrowers who don’t meet the typical lending standards. To qualify, borrowers will usually need a credit score of at least 500 but should expect to pay higher interest rates and fees.
- Co-signer or co-borrower: If a client still can’t qualify for a mortgage on their own, a co-signer or co-borrower could potentially help. A co-signer is someone with better credit who agrees to take over financially if your client is unable to pay. A co-borrower is someone who applies for the loan alongside the client and shares the repayment obligation.
Whatever the borrower’s situation and goals, help them determine the best path forward.
“Should I Raise My Credit Score Before Buying a House?”
We’re not going to lie; higher credit is almost always helpful. But that doesn’t necessarily mean that waiting for a higher score is right for everybody.
Each borrower’s financial situation is unique, and the right decision will depend a lot on their needs and preferences. Whatever they eventually decide, thoroughly talk this decision through with them.
“How Can I Raise My Credit Score?”
Of course, if they’d like, borrowers can always work to improve their credit score before buying a house.
If this sounds best, clients can make a point to:
- Pay their bills on time every month.
- Keep their credit card balances low and pay them off in full each month.
- Comb through their credit report, check for errors, and dispute any inaccuracies.
- Keep old accounts open, even if they don’t use them anymore.
- Don’t let their accounts go into collections and try to negotiate payment plans if struggling to make payments.
If borrowers do choose this path, they must remember to be patient with themselves. Improving credit can be a lengthy process.
Getting a Mortgage with Bad Credit
So, are you ready to share the knowledge with potential borrowers? Remember to approach the situation with care and empathy. Then, go ahead and work your magic.
Looking to have the hottest mortgage insights delivered directly to your inbox? Sign up for the wemlo newsletter where we round up the latest business and mortgage trends all in one place.
This information is not considered legal or financial advice. Please consult with a credit counseling professional.