Financial hardships hit many individuals and families for a variety of reasons. The cause of a financial hardship varies and includes –
- Being the victim of a crime, or a cybercrime.
- Being in a devastating accident.
- Being diagnosed with a chronic or life-threatening illness.
- Making ill-informed or erroneous financial decisions and investments.
- Overspending, showing an inability to appropriately manage one’s credit profile, among others.
Yet despite the cause, one’s credit score will generally take a significant tumble downward when one is faced with a financial crisis. How far a credit score will fall depends on the exact circumstances of each individual.
Credit scores have been in use since the mid-1950s when mathematician Bill Fair (of Fair Isaac & Company, Inc. — FICO) designed an unbiased, objective logarithmic program to score one’s credit use. By the late 1980s, the FICO credit scoring system had become an integral part of lending/underwriting decisions — with more than 10 billion credit scores provided annually. This market prevalence occurred because FICO scores have been shown to accurately predict a borrower’s financial creditworthiness. This accuracy allows lenders to make better-informed mortgage/loan lending decisions.
The good news is that a credit score is a living measurement of one’s creditworthiness — this means it can change based on one’s credit/spending habits. In other words, consumers have some control over their scores; however, the command must be managed by a mature approach to financial management.
How do Home Loans for Bad Credit Work?
A FICO credit score ranges between 300 and 850, where 300 is the worst credit score issued. Generally speaking, credit scores that fall beneath 630, are broadly characterized as Poor-to-Bad. It becomes more challenging to secure a mortgage when one’s credit falls within the lowest portion of the FICO score scale.
However, there are ways in which to improve your chances of mortgage approval until your score improves –
- A Larger down payment reduces a lender’s risk and encourages positive lending decisions.
- Agree to a higher interest rate (or increased origination fees) to compensate the lender for the increased risk posed by your current poor credit score.
- Request other options directly from your lender.
As a result, mortgages for those with lower credit scores are typically more expensive than their traditional mortgage counterparts. However, obtaining a higher price mortgage provides borrowers an opportunity to buy a house/condo (which would not usually be available) and improve their credit scores by paying monthly mortgage payments as agreed.
Improving Your Credit Score
It is also smart to improve your score before applying for a mortgage loan. Scores improve when a borrower –
- Pays debts as agreed.
- Reduces debt.
- Uses credit limits and debt prudently, among other options.
The most relevant credit that impacts a credit score reflects recent activity. Start improving your credit score today by using the above-noted techniques.