Think you can’t buy a home with bad credit? Think again

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Your credit plays a huge role in your ability to get a mortgage. This affects which loans you are eligible for, how much you can borrow, and how much interest you will pay over the life of the loan. However, it is still possible to buy a home with a bad credit history.

If you are considering buying a home, stay away from these all too common credit myths that may hold you back:

Myth 1. You need perfect credit.

A flawless loan will certainly make it easier (and cheaper) to get a loan, but this is by no means a requirement. FHA loans only 500 credit points are required, provided you can make a 10% down payment, while VA loans have no credit score requirements.

According to the latest data from mortgage technology provider Ellie May, the average FICO score on a purchase loan in August 2020 was 752. This means that almost half of all borrowers had a score of 749 or less.

Myth 2: You can’t buy a house if you have a lot of student loan debt.

Just being in debt is not a problem. What matters to lenders is how much debt you have and how you manage it. To see if your student loans will be in trouble, it’s important to consider your debt-to-income ratio, or how much of your monthly income is borrowed by loans and other debts.

Most lenders want to see a debt-to-income ratio of 43% or less, including your new monthly payment. In some cases, you can increase up to 50% if your credit is good.

Myth 3: you have no credit at all.

Many newbie shoppers have never taken a credit card or loan before and therefore have no credit rating at all. While this does make it difficult for the lender to assess the risk of the borrower, there are ways to get around this

For example, attracting a co-borrower can be of great help, especially if they have a good credit rating. Increasing your down payment can also improve your chances.

Credit score matters, but that’s not all

You can buy a home with bad credit, but your credit definitely matters when buying a home, so try to boost your account and pay off overdue bills before filling out your mortgage application. Just remember, great results aren’t everything. If your result is not perfect, talk to a loan officer about how you can improve your application. This can usually be done in several ways.

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