How to Get a Home Loan with Bad Credit in Arkansas

10/27/2020

The thought of getting approved for a home loan to buy a house can be overwhelming and complicated, especially if you have a poor credit history. But don’t let having bad credit stop you from applying for a home loan.

At Arkansas Federal Credit Union, we offer options to our members to help them become homeowners, even with poor credit history. It all starts with taking a look at your credit history and making a plan for getting approved for a loan.

One of the first things that lenders, banks, and credit unions look at when approving someone for a loan is credit score. Credit score is a good indicator to lenders of how responsible someone will be at paying back a home loan. Understanding your credit score and improving your credit score to become a qualified applicant are all parts of the process of becoming a homeowner if you have bad credit.

A credit score is a number given to you by one of the three major credit bureaus that banks and credit unions use to determine how big of a lending risk you may be. This is not to be confused with your credit report, which is a report of your entire credit history, which shows late payments you’ve made, penalties, or bad marks that negatively impact your credit score.

The best-known type of credit score is known as your FICO score. It is a single number that ranges from 300 to 850 and is broken down into different categories such as bad, good, and excellent. FICO scores between 670 and 739 are considered good credit. Anything above is excellent and anything below is considered fair or poor credit.

Check Your Credit History and Score Before Applying for a Home Loan

Sometimes consumers find they have bad credit because of inaccurate credit history only when they’ve been denied a loan and feel blindsided by the loan approval process. Checking your credit beforehand can help you avoid a home loan denial.

The first step before applying for a home loan is to review your credit report for any errors that may negatively impact your credit score, correct any misinformation, and check your credit score.

The Consumer Financial Protection Bureau has a guide on common errors to look for in your credit report and you can request a free annual credit report. After you’ve checked your credit history for any errors, you should check your credit score to get an idea of which lenders to approach about getting a home loan.

Typically, anything below a score of 500 may make it challenging to be approved for a loan. If you have a credit score below 500, building or rebuilding your credit first before applying for a home is typically the path towards homeownership. If you’re between 500 and 670, however, some Arkansas mortgage lenders may still approve you for a home loan in certain circumstances.

Can You Get Approved for a Home Loan with Bad Credit?

Buying a home with a bad credit score isn’t impossible. If you have a low credit score between 500 and 670, you’ll typically pay a higher interest rate and monthly payments for your home and may not be approved for as high a purchase price amount.

If you want to pay less for your home, there are options to consider if you have bad credit. This can include:

  • Shopping around for different loan options. You may be able to save a lot of money by simply looking at different lending options in your area.
  • Consider credit home loans available in your area. For entry-level or first time home-buyers, you may find options such as FHA loans that will save you money.
  • Don’t open a new line of credit. When you’re in the market to buy a new home, try to avoid making big purchases or applying for new lines of credit as it can lower your credit score and impact your total income to credit ratio.
  • Find a co-signer. If you can rely on family or friends to co-sign on a home loan for you, it may increase your chances of getting approved.
  • Make a large down payment. Some lenders will be more willing to loan to people with bad credit if they make a large down payment on a home.

How Can I Improve My Credit Score to Qualify For a Home Loan?

Before throwing in the towel on applying for a home loan in Arkansas with bad credit, improving your credit score can help you qualify for a loan and may be easier than you think. Boosting your credit score can help you get better interest rates, lower mortgage payments, and lower down payments on a home.

Correct Errors

When there is a mistake on your credit, it can negatively impact your credit score. Check your credit score and credit report for any errors so you can dispute any wrong inquiries. Disputing errors can boost your credit score quickly.

Pay Down Debt

Paying down your debts and limiting your credit utilization score can improve your score rather quickly. If you’re maxing out credit card limits often, your score can be greatly impacted. Credit utilization is the ratio of outstanding credit card balances to your credit limit. If you have a high percentage of utilization of credit, it can lower your credit score. However, keeping your utilization at about 30-40% can improve your score.

Make Payments on Time

When you miss payments or don’t make payments on time, credit lenders penalize you and it can dramatically impact your score. Making payments on time can not only gradually raise your score but it can also prove your trustworthiness with lenders.

Monitor Your Credit Score

Regardless of what you may have been told, frequently checking your credit score shouldn’t hurt your score. Every few months it’s best to check your score to see where you stand and have a better understanding of the areas of improvement that could be made. Checking your score for improvements can also tell you what you can do to improve your score and what’s working to improve your score.

In fact, the three major U.S. credit reporting agencies – Equifax, Experian and TransUnion – are now offering consumers free weekly credit reports through April 2021. The reports, available on AnnualCreditReport.com, are available to all Americans since so many have been faced with financial hardship due to the coronavirus. Normally, you can only get one free copy of your credit report every 12 months.

Avoid Applying for More Credit

When you open multiple lines of credit within a short timeline, it could have a negative impact on your credit score. For example, if you move into a new apartment, buy new furniture, and apply for a credit card within the same timeline, all of those actions take a hit to your credit. Several hits to your credit back to back or within a few weeks from each other can hurt your credit score.

Want to Learn About Home Loan Options for Bad Credit?

Bad credit doesn’t have to stand in the way of purchasing an affordable home. Arkansas Federal offers members great deals on home loans to meet all of your needs as well as credit rebuilding tools like our Credit Builder Loan.

Speak with one of mortgage experts to learn more about your options and how working with Arkansas Federal can help you achieve your dreams of owning your own home.