The best place to start is by checking your credit score. Many first-time buyers need to realize that mortgage lenders use a slightly different credit scoring system than other lenders such as automobile and credit card finance. Mortgage lenders use algorithms designed specifically for real estate and will look for credit scores between 300 and 850. If you can get pre-approved for a mortgage before you start hunting for your dream home, you will have a better idea of your budget. As your local real estate agent in Knoxville, we provide a wholistic approach to real estate and will guide you through every step of buying your home. The first thing we can help with is choosing a lender who will pre-approve that mortgage for you.
What is Bad Credit?
When your credit score or historical payment record falls below your lender's expectations, you are considered to have bad credit. Different lenders have different minimum thresholds. Some will look for a minimum of 500, while others prefer a higher score of 580 or even 620. The theory is that the higher your credit score, the safer it is to lend you money! However, only some people with bad credit will have problems with debt. Many have not yet had an opportunity to build a credit score. This is especially true of young, first-time homebuyers. It seems more logical to call it 'qualifying credit' rather than bad credit, which has some negative connotations.
There are several other factors beyond credit score that lenders will look for when deciding whether or not to offer someone a mortgage. These can include things like:
- How much cash the buyer has for a down payment
- The overall amount of debt held by the borrower and whether any of them are currently in collections
- How much the loan applicant earns
Buying a Home With Bad Credit
As your local real estate agent in Knoxville, we can help you to find a great mortgage lender from our trusted network of advisors. They will be able to guide you toward lenders who are more likely to work with you despite a low credit score. You can also take steps to improve or repair your credit score before applying for a mortgage. Of course, this is a challenging fix as it takes time to build better credit, but it could be worth it in the long run as you may save thousands of dollars in interest. You can discuss your options with a local real estate agent in Knoxville and a recommended mortgage advisor to see if this might be something that you want to pursue. Some of the things that can impact your credit score include:
- Payment History - Did you know that your payment history is responsible for 35% of your credit score? Paying your bills on time is one of the best ways to take care of your credit score. If lenders see that you have a history of making your payments on time, they will feel more comfortable lending you money.
- Credit Utilization - If you already have existing credit cards or loans, then lenders will also look at your credit utilization which accounts for 30% of your credit score. Try to keep your credit utilization under 30% when you can. For example, if your credit card has a $1000 limit, you should keep the balance around $300.
- Age of Credit History - This is the part of your credit score you will have very little control over. Establishing your credit history with older credit accounts is better, but you must wait to go back to create them! You can avoid making new applications within 6 to 12 months of applying for a mortgage.
If you need some advice on your mortgage applications or any other aspect of buying your new home, talk to Wright Realty. We are your local real estate agent in Knoxville and take a holistic approach to provide concierge-level real estate services.
Wright Realty is a full-service real estate concierge with a wholistic approach to buying and selling property in East Tennessee. We are your trusted advisor and keep open communication throughout your entire buying/selling process. Real Estate done "Wright" means more than just a 'transaction'.
Finding Your Property the "Wright" Way!