How Bad Credit Can Prevent You From Qualifying for a Home
Credit is an incredibly important aspect of your financial history which can, unfortunately, prevent you from qualifying for a home. Credit allows potential sellers and mortgage lenders to review your financial history and determine if you’re a reliable borrower.
Having bad credit can make it much more difficult to qualify for your dream home due to these reasons.
Prevent You From Getting a Loan
First and foremost, bad credit can make it incredibly difficult to convince banks, credit unions, or other institutions to lend you money. In order to qualify for a traditional mortgage, you typically need a credit score of at least 620, likely higher for first-time homeowners.
Without a credit history that shows your financial responsibility and ability to commit to a long-term payment structure, lenders will be wary of letting you borrow large amounts of money.
Higher Interest Rates
Even with bad credit, you still might be able to find a lender willing to lend you money to purchase a home. However, it will almost definitely have a much higher interest rate than normal.
As a bad credit score generally indicates that lending you money is a high-risk decision, lenders will offer higher interest rates to counteract the risk. As a result, you might find that the interest rate you’re offered makes it impossible for you to afford the mortgage in the long-term.
Larger Down Payments
Additionally, lenders might require you to put forth a much larger down payment before they are willing to lend you money. This is another way lenders minimize their risk when dealing with borrowers with poor credit history.
For many individuals, the down payments required to qualify for a loan may be out of reach as they can be fairly significant. As a result, this is one of the many ways that bad credit can prevent you from qualifying for a home.
High Insurance Premiums
When you take out a mortgage, your home is the asset that is used to secure the loan. As a result, mortgage lenders typically require borrowers to have homeowners insurance to protect the home in question.
Unfortunately, bad credit can make it difficult to qualify for the insurance you need to protect your home and satisfy the requirements of your loan. Even if you are able to qualify for insurance, the premium may be too expensive due to your bad credit.
Not Able to Qualify for a Large Enough Mortgage
Lastly, while you might be able to find a suitable lender, and you might even be lucky enough to qualify for reasonable interest rates, you might not be able to borrow as much as you need to pay for your desired home. Due to the risk of lending to you, lenders might only let you borrow up to a certain amount just in case you default. As a result, you might not be able to afford the price of homes in your local real estate market.
Your credit history is incredibly important as many financial institutions will rely on it to determine whether or not you are a reliable borrower. As a result, bad credit can prevent you from qualifying for a home in your local market.