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  • How To Buy A House With Bad Credit | Bankrate

    How To Buy A House With Bad Credit | Bankrate

    Key takeaways

    • You can get a mortgage with a credit score as low as 620, 580 or even 500, depending on the type of loan.
    • Some mortgage lenders offer bad credit loans with more flexible qualifying requirements but higher costs. Others offer free credit counseling to help you improve your score before applying for a loan.
    • While you might be eligible for a mortgage with a low credit score, you’ll pay a higher interest rate for the loan. That’s why it’s best to work on your credit prior to getting a mortgage.

    Your credit score is the first factor mortgage lenders consider when determining whether you’re eligible for a loan. In general, a good to excellent credit score translates to more loan options and a better mortgage interest rate. However, you might still be able to buy a house with a lower credit score. Here’s how.

    Can you buy a house with bad credit?

    Yes, you could buy a house with bad credit. There are several mortgage programs that allow for lower credit scores, including conventional (the most popular loan type) and FHA loans.

    The typical mortgage borrower, though, has very good credit. As of the first quarter of 2024, the median credit score for a mortgage borrower was 770, according to the Federal Reserve Bank of New York.

    Mortgage lenders reserve their best rates for borrowers with credit scores at 740 or higher — considered “very good” by FICO scoring standards.

    How do mortgage lenders evaluate credit?

    Lenders rely on data from the three main credit reporting bureaus, Equifax, Experian and TransUnion. Typically, your lender will look at the middle credit score of the three when considering you for a mortgage. In addition to your scores, your lender will look at your credit report, including total debt and any issues like defaults or late payments.

    What do mortgage lenders consider a low credit score?

    Your credit score isn’t the only factor in your mortgage approval odds, but it’s a key indicator of your risk as a borrower. Mortgage lenders most often use the FICO credit scoring model to assess creditworthiness. Here’s how those ratings work:

    Credit score range Rating
    Source: FICO
    Below 580 Poor
    580-669 Fair
    670-739 Good
    740-799 Very good
    800 or above Excellent

    Types of bad credit home loans

    Loan type Credit score minimum
    Conventional loan 620 or 660 depending on program
    FHA loan 580 (or 500 with a minimum 10 percent down payment)
    VA loan No official requirement, but typically 620
    USDA loan No official requirement, but typically 640

    Conventional loans

    Fannie Mae and Freddie Mac each back conventional loans with a lower minimum credit score: 620 and 660, respectively. Both of these loans require just 3 percent down.

    FHA loans

    The Federal Housing Administration (FHA) insures FHA loans, which allows mortgage lenders to accept a credit score as low as 580 with a 3.5 percent down payment, or 500 with a 10 percent down payment.

    VA loans

    If you’re a military member, a veteran or married to someone who has served in the armed forces, you could benefit from a VA loan backed by the U.S. Department of Veterans Affairs. You don’t have to meet a specific credit score minimum to qualify, although many lenders do require at least 620.

    USDA loans

    If you have a lower income and want to buy a home in a particular rural area, look into a USDA loan. While not a hard-and-fast rule, most USDA-approved lenders require a minimum credit score of just 640.

    How to get a mortgage with bad credit

    You can get a mortgage with a lower or bad credit score, but you’ll still need to financially prepare to make sure you get the best possible loan terms. Here are some steps to take:

    1. Check your credit report for errors

    If you’re wondering whether you can buy a house with bad credit, check your reports first. If you see a mistake or outdated item — generally seven years old, but sometimes longer for bankruptcies, liens and judgments — contact Equifax, Experian or TransUnion. Each credit bureau has a process for correcting errors and out-of-date information.

    2. Pay down or pay off debt

    When working toward buying a home with bad credit, try to pay down what you already owe. Lowering your debt load might not only boost your credit score, but also make you eligible for a bigger mortgage, thanks to a better debt-to-income (DTI) ratio.

    3. Shop around

    Every mortgage lender is different, and some offer lower rates and fees than others. If nothing else, research shows that getting multiple rate quotes can save you thousands over a 30-year mortgage. Banks aren’t the only spot to get a mortgage, either. There are also non-bank and online-only lenders, credit unions and other types of mortgage companies. Check out these different types of lenders to see where you get the best offer.

    4. Find a co-signer

    If you have bad credit, consider asking a family member or friend with better credit to co-sign your mortgage. This can help give your application a boost — but only if the co-signer is able and willing to take on the debt. (Note that co-signing is different from co-borrowing.)

    5. Avoid too-good-to-be-true loans

    If you see ads promising “guaranteed” approval for a mortgage regardless of credit, it’s a red flag. Under federal rules, a lender must verify the ability of a borrower to repay a mortgage, so there can’t be a “guarantee” unless that happens. Even if you get that guaranteed approval, it usually comes with excessive or inflated costs.

    6. Consider a rapid rescore

    Credit report changes can take time to go through the system, so improved scores might not show up in time for a mortgage application. In this case, you can try getting a rapid rescore through your lender. In this process, your lender submits proof to a credit agency that an applicant has made recent changes or updates to their account that are not yet reflected on their credit report. You’ll need to pay for this service, but the expense might be a worthwhile tradeoff to get a better interest rate.

    How much will a low credit score cost you?

    A poor credit score will primarily cost you in the way of a higher interest rate. Here’s an example assuming a 30-year conventional loan for $400,000:

    FICO score APR* Monthly payment Total interest paid
    *As of July 2024Source: myFICO loan savings calculator
    760-850 6.254% $2,464 $487,007
    700-759 6.476% $2,522 $507,906
    680-699 6.653% $2,569 $524,715
    660-679 6.867% $2,626 $545,208
    640-659 7.297% $2,741 $586,929
    620-639 7.843% $2,891 $640,903

    Bottom line

    It is possible to buy a house with bad credit, but you should take steps to improve your score, if possible, before applying for a mortgage.

    FAQ

    • It depends on the type of mortgage. Private mortgage insurers — which offer mortgage insurance for conventional loans, known as PMI — base their rates on credit score, among other factors. Generally, if you have a lower credit score, you’ll pay more for PMI.On the other hand, if you’re getting an FHA loan, your credit score won’t impact how much mortgage insurance you pay — those rates depend on the loan term, loan amount and size of your down payment.

    • Yes. Mortgage lenders take into account a variety of factors when pricing loans, including the borrower’s credit score. Generally, if you don’t have good credit, that’s a sign you’re a riskier borrower. To compensate for taking on that risk, your lender will charge you a higher interest rate.

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  • What happens to a HELOC when you sell your home? | Bankrate

    What happens to a HELOC when you sell your home? | Bankrate

    kali9; Illustration by Issiah Davis/Bankrate

    Key takeaways

    • When a home is sold, a HELOC must be paid off, along with any other debts secured by the property.
    • Outstanding HELOC balances are typically settled during the closing, out of the sale proceeds.
    • If the home sale proceeds are not enough to cover the HELOC and mortgage, the seller may need to come up with cash or explore alternative options like a short sale.

    Are you selling your home and have a home equity line of credit (HELOC)? Get ready to say goodbye to them both. As an active debt tied to the property, the HELOC must be paid off when that property changes hands.

    While this may sound tricky, it’s actually quite doable with the proper preparation. Here are the steps to take when selling a house with a HELOC to ensure a smooth transaction.

    Why do home sellers have to pay off their HELOC?

    A HELOC is essentially a loan, backed by the equity you have in your home. And any outstanding obligations secured by your home have to be settled when you sell your home. That includes your primary mortgage, along with the HELOC.

    During closing, the title company or closing attorney will order a payoff statement from your HELOC lender. The document will detail the amount needed to settle the HELOC: your outstanding balance, including any accrued interest and fees. But you don’t have to write a check — generally, the sum just gets deducted from the money the homebuyer is paying you.

    “It’s almost identical to a first-lien mortgage; it gets paid off, and then whatever proceeds are left after the payoff would be due to the seller,” says Tom Hutchens, executive vice president at Angel Oak Mortgage Solutions, an Atlanta-based correspondent lender.

    Example

    Imagine you sell your home for $400,000, with a $100,000 primary mortgage and a $50,000 HELOC remaining on your property. The $100,000 mortgage would have to be paid first due to its first-lien position, leaving you with $300,000. Then, you would settle your $50,000 HELOC, leaving you with $250,000. Any closing costs are deducted from this amount, leaving you with the final proceeds.

    After the sale closes, the line of credit is shut down. Your lender will confirm that the HELOC has been paid off and release any liens on the property.

    Complications in closing a HELOC when you sell a home

    While settling a HELOC may sound straightforward, two factors may complicate the process: the amount of equity you have in your home and whether the loan has any prepayment penalties.

    You are underwater

    When you sell your house, the proceeds go towards paying off your primary mortgage first. The money left after that then goes towards paying off your HELOC and any other debts secured by the property.

    But what if the sale price isn’t enough to cover all these debts — if you owe more on the home than it’s currently worth, a condition known as negative equity or being underwater/upside down?

    “There’s so much home equity out there…it would be extremely unique for that to be the case,” says Hutchens. “But if somebody were underwater when they sold the house, instead of getting proceeds, they would be bringing cash themselves to make up the difference.”

    And what if you don’t have cash to make up the difference? In that case, you’ve got a problem. You might try to do a short sale, in which you’re allowed to sell the home for less than your outstanding mortgage, though probably both the mortgage lender and the HELOC lender would have to agree.

    Other options that might make more sense:

    • Wait to sell until housing prices go up in your area, giving you time to build or rebuild your home equity stake
    • Wait until you’ve saved up enough money to cover the outstanding HELOC balance
    • Step up repayments on the HELOC to get that balance down
    • Take out a personal loan to cover the HELOC balance

    The lender has prepayment penalties

    A HELOC prepayment penalty is a fee the HELOC lender charges if you settle the debt ahead of schedule. These penalties reimburse the lender for the interest they would have earned if you had gone the full repayment period. Also referred to as an ‘early termination fee,’ the penalty can be 2 percent to 5 percent of the loan or a flat fee.

    Though not as common as years ago, prepayment penalties do still exist, especially among traditional banks. If you are unsure if your loan has one, contact your HELOC lender. Like any aspect of a loan, you can negotiate the terms, though there’s no guarantee the lender will agree.

    Bottom line on HELOCs when selling your home

    When you decide to sell your home, your HELOC’s life ends — but it doesn’t just disappear. You must repay the funds you withdrew from it, along with any accrued interest. The payoff occurs during closing, with the amount deducted from your sale proceeds.

    To keep things running smoothly, before even listing your home, get an accurate payoff amount for your HELOC and a sense of any early termination fees. Get the latest statement from your mortgage lender as well. Stay in touch with both lenders throughout the home-selling process.

    Knowing all these costs and where you stand ahead of time can help you avoid surprises at closing. The key is to ensure you won’t be caught short and can comfortably handle all the expenses of selling your home.

    “Home sellers “need to understand what their balances are on their first lien mortgage as well as their home equity line of credit,” Hutchens says. “They need to make sure whatever they’re looking to sell that property for, that they’re still going to be in a positive situation at the closing table. Or if not, understand how upside down they are before going forward with the sale of the property.”

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  • How Nonprofit Debt Consolidation Works | Bankrate

    How Nonprofit Debt Consolidation Works | Bankrate

    Key takeaways

    • Nonprofit debt consolidation can make debt payments more manageable by reducing the number of bills you need to pay.
    • Unlike traditional debt consolidation, where borrowers pay off existing debts with a new loan, nonprofit debt consolidation relies on a debt management plan that works with your existing debts.
    • You may want to try a nonprofit service before considering a for-profit company.

    If you’re one of the almost half of Americans who carry a credit card balance every month, you might struggle to juggle multiple debt payments to numerous creditors. You have to remember all the different due dates and make sure the money is available when you need to pay each bill.

    Debt consolidation can help by combining two or more debts into a single payment with a due date that works for you. Nonprofit debt consolidation may be particularly useful for borrowers who are taking care to protect or improve their credit scores.

    What is nonprofit debt consolidation?

    Unlike traditional debt consolidation, nonprofit debt consolidation does not require a new loan to pay off your other debts.

    Instead, a nonprofit debt consolidation service works with your creditors to create a debt management plan (DMP). The DMP allows you to make one payment to the nonprofit consolidation services each month. The service will distribute your payment to the individual creditors for you.

    “Nonprofit debt consolidation can be a good option for those feeling overwhelmed by multiple payments with different due dates to remember,” says Katie Ross, executive vice president for nonprofit American Consumer Credit Counseling. “With debt consolidation, you make one monthly payment on the day of the month that works best for you.”

    It’s important to note that “nonprofit” doesn’t necessarily mean the service is free for borrowers. It simply means that the service does not turn a profit for owners.

    However, much of the nonprofit debt relief services funding comes from government programs, grants and donations. As a result, these organizations can offer much lower fees for their service than a for-profit company that relies on customers to turn a profit. Sometimes, nonprofit debt relief organizations may have enough outside funding to offer their services free to borrowers.

    How nonprofit debt consolidation works

    When you hire a nonprofit debt consolidation company, a financial counselor will contact your creditors to negotiate more favorable terms on your debts.

    The counselor might be able to get late fees waived or even lower your interest rate. A lower interest rate reduces the total amount you’ll have to pay on the debt, which can mean a lower monthly payment.

    The counselor will then create a DMP based on your budget and schedule. Tell your financial counselor if you are struggling to make the current payments on your debts. They may be able to negotiate lower monthly payments either through lower interest rates or by extending the terms of the loans. Just remember that extending the loan term may mean paying more in interest expenses over the long haul.

    You should also tell your financial counselor which payment date works best for you. For example, if you get paid on the 1st, they might schedule the payment for the 4th, when you will likely have the funds in your account.

    Your counselor will then present the proposed debt management plan to your creditors for approval. Nonprofit debt consolidation only works if creditors agree with the proposed arrangement.

    Types of debt eligible for nonprofit debt consolidation

    Nonprofit debt management services typically only apply to unsecured debt.

    Credit card debt

    This is the most common type of debt in debt management plans. Americans carry a lot of credit card debt. With credit card interest rates being so high, your credit counselor may have more room to negotiate the rate down. A lower rate could reduce your monthly payment or even help you pay off the balance faster.

    Credit card companies may require you to close active accounts before they will approve a debt management plan. You would not be able to use that card for future purchases, and it may result in a temporary decrease in your credit score.

    The average age of credit and total available credit are two main factors in calculating your credit score. Closing a long-open account affects both categories.

    Medical debt

    Medical debt comes with more consumer protections than credit card debt, so a nonprofit debt management counselor may have more options for negotiating this debt, such as social service referrals. In some states, medical debt forgiveness may be an option.

    Student loans

    Student loans may or may not be eligible for nonprofit debt consolidation, often depending on if they are federal or private. However, there may be additional options to help ease the student loan burden.

    According to Ross, “These options may include loan cancellation, consolidation or income-driven repayment plans. The options will vary depending on whether the client has federal or private student loans, as federal student loans have different types of repayment plans.”

    Debts that are ineligible for nonprofit consolidation

    Debts that are secured by collateral are typically excluded from debt consolidation services.

    Home loans

    Home mortgage loans are secured by the property being mortgaged. This means the lender could foreclose on the home if the borrower fails to repay the loan. Home loans are not eligible for nonprofit debt consolidation plans as a secured debt.

    Auto loans

    Auto loans are secured by the vehicle. If a borrower fails to repay the loan, the lender could repossess the vehicle. Using the automobile as collateral disqualifies auto loans from nonprofit debt consolidation.

    Nonprofit debt consolidation vs. for-profit debt relief

    Nonprofit debt consolidation and for-profit debt consolidation have several important differences.

    The financial objectives of the companies

    Nonprofit credit counseling agencies are not focused on turning a profit. Any profits must be funneled back into activities that support the organization. No individual shareholders are looking to benefit financially from the organization’s profitability.

    By contrast, for-profit debt relief companies aim to make money from their services.

    How the organizations are funded

    Nonprofits receive financial support from other sources, such as grants, government programs and charitable donations, so their services are inexpensive or free to borrowers.

    For-profits are funded by the consumers using the service. This means for-profit companies must charge customers more than nonprofit organizations.

    When the organizations pay creditors

    Nonprofit debt consolidation services can begin making payments to creditors on your behalf as soon as the creditors approve your DMP. As long as payments are up to date on your accounts, the nonprofit debt consolidation service can take over with no interruption to your payments. This means no late fees or penalties from the creditors.

    For-profit debt relief companies, on the other hand, often require that accounts go delinquent before they begin negotiations. They want the creditor to be concerned that the borrower may default on the loan completely. That gives the debt counselor more leverage in negotiations. While this strategy can potentially result in some level of debt forgiveness, it can also severely impact your credit score and finances.

    “Not paying your creditors will result in collections, additional late fees and possibly legal action,” says Ross.

    Additionally, there is no guarantee that your creditors will accept the proposed settlement, which would mean risking your credit score for nothing.

    Ongoing support

    Nonprofit debt consolidation agencies often provide free educational resources to help with financial tasks like budgeting, credit repair or retirement planning.

    For-profit debt settlement companies may offer some free resources for ongoing support but often charge for premium versions of these tools.

    Pros and cons of nonprofit debt consolidation

    The benefits of nonprofit debt consolidation include:

    • Less impact on your credit score compared to a for-profit debt relief service
    • Lower cost than for-profit debt relief
    • More manageable payment schedules
    • No need to apply for a debt consolidation loan
    • Potentially lower interest rates
    • Potentially lower monthly payments

    There are also a few possible downsides of nonprofit debt consolidation, including:

    • A temporary dip in your credit score
    • Not available for secured loans
    • The requirement to close accounts

    How to choose a nonprofit debt consolidation service

    When selecting a nonprofit debt relief company, look for one accredited by an independent organization.

    Companies that join the National Foundation for Credit Counseling (NFCC), for example, must be accredited by the Council on Accreditation (COA), an independent organization that accredits more than 1,600 social service organizations in the United States and Canada. Financial counselors with the NFCC have been trained and certified.

    You should also check online reviews to see if customers are generally satisfied with the service. Check reputable review sites like the Better Business Bureau, TrustPilot and Consumer Affairs.

    The bottom line

    Nonprofit debt consolidation is a legitimate, affordable way to manage debt by creating a more manageable repayment structure. Working with a nonprofit debt consolidation service can lower your interest rates, reduce your monthly payments and save your credit score from taking a major hit.

    Find a reputable nonprofit debt consolidation service by searching for accredited debt counselors through the National Foundation for Credit Counseling (NFCC).

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