Bad Credit? Don't Panic

Your credit score is important—it’s what lenders use to determine your qualifications for a home loan. You can request a free credit report here.  Then meet with a lender, who can help you come up with a game plan to strengthen it. Keep in mind it can takes months, or even a year, for your credit score to rise after you improve your finances. The illustration below breaks down how your credit score is determined:

If you have excellent or good credit (a score of 700+ according to credit.com), you’re in good shape. But what if you’ve got poor or bad credit, at 649 and below? Conventional loans may not be able to help. Instead, talk to a lender about the Federal Housing Administration’s loan program, which requires a credit score minimum of only 580 (most lenders, however, require 620 or 640) for a loan with a down payment of 3.5%. Lenders will also want to see documentation of your income and assets to calculate your debt-to-income ratio, which, as a rule of thumb, should not exceed 41% of your monthly gross income. The FHA insures lenders against default and offers mortgage rates comparable to those of conventional loans. However, FHA loans do have higher mortgage insurance requirements than conventional loans, as mortgage insurance payments must be made for the entire life of the loan unless you make a bigger down payment. Remember, a lender can always help you determine which type of loan is best for you.