It’s not uncommon for someone to have bad credit. Unfortunate things happen to very good people and as such they can fall into some uncomfortable economic situations. When lenders first extend credit they look at the ability of that person to repay the debt along with looking at previous payment patterns with past credit accounts. If the lender doesn’t think the person will pay back a loan based upon the lender’s terms the loan won’t be made. Lenders don’t enter into loan agreements with the understanding they won’t be paid back. Nor do borrowers enter into a loan agreement with the intention of not paying back the loan. Yet bad things do happen sometimes and good credit can turn into bad credit. A divorce. An extended illness or even death of a family member. A loss of a job or income. These are all the most common reasons bad credit is formed.
Okay, so if you do have bad credit, should you apply for a mortgage? Before that question is answered, make sure you have a full understanding of what bad credit really is. According to research, 30% of borrowers have credit scores below 600, considered bad credit by most lenders. But if you have a late payment or two in recent months that alone may not mean you have bad credit. Or, if you did have a string of late payments or even collection accounts, if they’re three or four years in your rear view mirror your scores might have improved since then as long as you’ve made timely payments since then.
If you do know you have less-than-perfect credit and want to buy a home, should you now or should you wait? That’s totally up to you. There are a very few so-called “subprime” mortgage lenders slowly testing the waters but most loan programs ask for at least a 580 credit score as long as you can document the poor credit was out of your hands and uncontrollable. If you had good credit prior to the unfortunate event that caused your credit to falter and have recovered with no likelihood the event will be repeated, lenders can make the determination you’re a good credit risk. But it’s completely up to them.
Credit scores can repair themselves sooner than you think and if you want to get the best terms and buy the home you really want, it might be better to wait until the scores rise above say 620 or so and apply later down the road.