When you were a child growing up, you always heard that in life you will work hard, buy property, and be able to live the American dream. Owning your own home is a symbol of “making it” in today’s societal standards.
Taking the steps to purchase your own home sounds simple enough, right? Well, it is not for many Americans. With the rising costs in housing, rentals, and other commodities paired with the low minimum wage and stagnant year-over-year wage increases, many people are living paycheck-to-paycheck making it almost impossible to catch up on their expenses and save. If bills are not being paid on time or the person has a high amount of debt, their FicoⓇ credit score may not be looking that great which will impact purchasing a home.
Why Is a Credit Score Important When Buying Your Home?
Your credit score is a number that shows your “financial health” or creditworthiness and the history of timely payments on the debt. Many lenders use the credit score as a gauge to verify that an individual is worthy of a loan from their establishment. The higher the credit score and positive payment history, the more confidence the lender has that the loan will be paid back in full and on time.
People with higher credit scores are typically treated better than people with low credit. A high credit score will make it easier to rent an apartment, get a credit card, get a mortgage, and more. Besides, the higher the credit score is, lenders will offer lower interest rates on loans.
An individual with a low credit score may get turned away from rentals, denied credit cards, or quoted higher interest rates on loans if not already denied. Some people say that there is “A high cost to being poor.”
Bad Credit? There may be options! But are they worth it?
People with bad credit may have the American dream of owning a home, too. You may not believe this but there are bad credit home loans available! Here is a breakdown of Conventional Loans vs. Federal Housing Administration Loans.
Please make note that any conventional mortgage loan must have a 20% down payment to avoid the necessity to buy private mortgage insurance, also known as PMI. Without the 20% deposit, the PMI is just another expense that the homeowner will incur. Depending on the value of the purchased house, PMI insurance could add hundreds to your monthly bills.
Federal Housing Administration Loans
The United States Department of Housing and Urban Development’s Federal Housing Administration offers several types of mortgage loan programs. Since the loans through the FHA are backed by the government, they are easier to qualify for, especially for individuals with poor credit. The downside of getting an FHA loan is that the mortgage insurance is usually rolled into the monthly mortgage amount, which increases the borrower’s monthly payment. If you are a first time home buyer, another similar option to consider would be USDA loans which are also backed by the government.
Start the Home Buying Process Now
It is never too late to change your life and buy real estate. Now that you know there are loan options available for people with not-so-great credit, your version of the American dream is not so far away. If you have the opportunity to increase your credit score by making payments on time and paying down debt, you may want to do that before securing any time of the loan.