Condos are a popular choice among first-time buyers, and on average, they cost less than single-family homes. But is it possible to buy a new condo with a poor or fair credit score? The short answer is yes.
“Just because you have a low credit score doesn’t mean you can’t purchase a home,” says Randy Hopper, senior vice president of Mortgage Lending for Navy Federal Credit Union. “There are a lot of options out there for consumers with low FICO scores.”
However, you’ll need to brace yourself, as the process for securing a loan with poor credit can be frustrating, and ultimately, you will pay more for your condo than someone with better credit. To make it easier, we’ve outlined the routes you can take to secure a loan, even with a less-than-stellar credit score.
Check Your Credit Report
Before doing anything else, even before you start condo shopping, you should check your credit report. You can obtain a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
Your credit report will not show your credit score, but you can obtain your score for free from Credit Karma, which provides scores from Equifax and TransUnion. Experian offers its own free credit score service. Your credit score, sometimes called a FICO score, is a number between 300 and 850 that helps financial institutions (and others) determine your trustworthiness as a borrower and the level of risk based on your financial history. A credit score of 740 or higher is considered “top tier” and will get you approved for a loan with the best interest rates and terms. A good credit score is anywhere from 670 to 739. In reality, if you fall below 680, lenders may consider you a risky investment.
Factors Affecting Your Credit Score
Let’s review the factors that influence your credit score:
- Payment history
- Debt-to-credit utilization
- Length of credit history
- Credit mix
- New credit
Fix Credit Mistakes
According to a 2012 Federal Trade Commission report, more than one in five consumers have an error on their credit report that negatively affects their credit score. Fortunately, both the credit bureau and the business that provided the information about you are required to fix inaccurate or incomplete information. You can dispute mistakes or outdated items by contacting the credit bureau and the business in writing. They will then conduct investigations, usually within 30 days, to determine if the information is accurate or not. If you made a one-time mistake (like a single late payment on a credit card), it doesn’t hurt to call the creditor and ask for it to be deleted from your report.
Expect a Higher Interest Rate
If your credit score is still under 700 even after fixing any mistakes, you may still qualify for a loan. That said, it will likely have less-than-wonderful terms. This kind of loan is called a subprime loan, and it will have interest rates that are a couple of percentage points higher than those offered to borrowers with good credit. These kinds of loans also often come with additional fees.
Increase Your Down Payment
If you can increase the standard 10 to 20 percent down payment to 30 to 50 percent, you may be able to obtain a hard-money loan to purchase a condo. “The more you put down, the more you minimize the risk to the lender,” says Todd Sheinin, mortgage lender and COO at Homespire Mortgage. Since a hard-money lender only covers 50 to 70 percent of the condo’s value, they can sell the condo for a profit if you fail to repay the loan, making it less risky for them. The repayment terms often include a high interest rate and short time frame, anywhere from a number of weeks to a few years.
Get an FHA or VA Loan
The Federal Housing Authority (FHA) works with lenders by insuring the loans in the event you default, which enables buyers with poor credit to qualify. Credit scores from 500 to 579 require a 10 percent down payment and buyers with a 580 or higher score only require 3.5 percent down. To qualify for an FHA loan, buyers must have a verifiable and steady income, be able to afford the payments in addition to any other debt, have a credit history that shows at least two lines of credit, and purchase a condo that is FHA-approved. Private mortgage insurance is the downside of an FHA loan and is required for anyone putting less that 20 percent down. The borrower must pay this insurance both up front and monthly to protect the lender if the borrower defaults. Veterans may also quality for special VA home loans.
If All Else Fails, Be Patient
If you discover that none of the above options are available or attractive to you, be patient.
“If your credit score is low, don’t assume that if you’re turned down by one lender that you can’t get a loan. You may have to apply to several lenders before you’ll get an offer,” says Jamie Young, a personal financial expert with the online loan marketplace Credible.
Plus, your current credit score can definitely be improved. A credit bureau can report negative information for seven years and bankruptcy information for 10 years. If your score just needs a bit of a bump, take 6 to 24 months to improve it by consistently paying your bills on time, pay down your balances and use less than 30 percent of your available credit. At the same time, try to put additional funds aside to get your down payment up to 20 percent. Experian Boost offers consumers an opportunity to have their utility payments factored into their FICO score, which is a great option for those with poor credit who consistently pay their utility or phone bills on time. Keep in mind that not all lenders will accept this information and factor it into their decision.
If you really don’t want to wait, one additional option is to find someone with good credit who is willing to cosign your loan. Even if you get a loan now that has less than exciting terms, you can refinance once your credit rating improves. Regardless of which path you take, they all lead to owning your own condo! And when you’re ready to start shopping for that condo, you can begin your search online at NewHomeSource.com.
For the last 16 years, Rachel Kinbar has been a writer of articles, blog posts, white papers, essays, infographics, web copy, sales copy, scripts, poetry, lyrics, and more. She has keen research skills that she applies to a wide variety of topics, and she especially loves topics related to design, history, and sustainable living.