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When you’re trying to buy a house, especially for the first time, it can feel like the deck is stacked against you.
Having bad credit can spell difficulty in getting a traditional mortgage loan. But wouldn’t getting off the rent cycle treadmill be a first step to rebuilding your finances?
What’s worse is that bad or poor credit can mean different things: a low credit score, a short credit history or a recent job change. Even open credit report disputes can make a mortgage lender say no.
But there are ways to improve your standing with lenders and realize your dream of homeownership — even with bad credit.
Why Bad Credit Is Such an Issue for Getting a Mortgage
First of all, it’s important to know what constitutes a good and bad credit score. When lenders query the credit bureaus (Equifax, TransUnion or Experian), they’re given a full credit report made up of details like your payment history, your total debt load, how much unused credit you have and more.
All of those factors comprise your credit score, which is an estimate of how likely you are to repay any new loan on time. If your credit score is low, you’re considered high risk.
Credit score ranges vary, but generally speaking there are five tiers.
- Excellent: 800 and above
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 580 and below
Remember that lenders are in the business of making money, and someone who defaults on a loan is a major issue for them. With a mortgage, when you’re borrowing hundreds of thousands of dollars, a high-risk borrower is an even bigger gamble .
Scores above 670 are generally considered lower risk. Anything between 580-669 is “sub-prime” – meaning a borrower can still qualify, but the terms might not be that great. Borrowers with scores below 580 might find it difficult getting credit or finding decent loan terms at all.
For a mortgage, there is no “magic number” – as lenders can always make exceptions. But a general rule of thumb…
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