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Do You Need Good Credit to Buy a House?

Aug. 25, 2016
Credit Score, Mortgages
Do You Need Good Credit to Buy a House?
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Owning a home is part of the traditional American dream, but some believe it’s a dream meant only for people with good credit or a significant income. Fortunately, that isn’t always the case. A few hiccups on your credit history don’t have to spell a lifetime of renting. You could still qualify for a mortgage.

A mortgage is a secured loan to purchase a home, where the property itself acts as collateral. Unlike credit cards for good credit, which are unsecured, a mortgage involves a bank extending far more credit to a borrower.

Because the bank is typically sticking its neck out to the tune of a few hundred thousand dollars, it wants to ensure it’s loaning money to someone who is likely to pay it back promptly. So there are some qualification standards.

» MORE: Best lenders for low credit score borrowers

What the lender looks at

Your credit is certainly part of the mortgage qualification process. But you don’t necessarily have to have good credit.

Because lenders also consider your debt-to-income ratio, the amount you want to borrow and the value of the home, good credit isn’t the hard-and-fast requirement you might think.

Lenders will consider your credit score, but they’ll also review your assets, debts and credit card accounts. They’ll want to know whether you have a history of paying debts or if there are any red flags indicating an inability to responsibly manage your finances.

If they see any such indicators or have questions about certain debts, you can believe they’ll ask for clarification.

Credit requirements for mortgage approval

While candidates for the best mortgage rates have good to excellent credit and a low debt-to-income ratio, they aren’t the only ones qualifying for home loans.

Both the federal government — through FHA loans — and private lenders are willing to offer loans to people with fair and even bad credit.

But loans for people with bad credit are likely to come with higher costs and interest rates, so there is definitely incentive to keeping your credit in good standing.

Considering a home loan with bad credit?

If you have a marred credit history and are looking to purchase a home, it may be wise to work on your credit score before you shop for a mortgage. If you can pull your score from poor to fair, or fair to good, you’ll find loans with far better terms available to you.

So, where do you start?

Make all of your credit card payments on time, pay off debts and keep credit card accounts open even when they’re paid off. If you can qualify for a credit card for people with good credit, use it to make small purchases and consistent, on-time payments.

Polishing up your credit score doesn’t happen overnight. But, like owning a home, it’s well worth the effort.

This article was updated Aug. 25, 2016. It originally published Dec. 22, 2014.

Image via iStock.