Your credit score is one of the few data points in your life that you simply cannot escape. Whether you are attempting to buy a home, rent an apartment or obtain a credit card, the chances are good that your credit score will play a decisive role in the outcome of your efforts. Although maintaining a high-quality credit score is actually relatively simple, inadvertently damaging it can also happen quickly. Once your credit score has taken a hit, it may take several months or even years for your mistake to be erased. Fortunately, there are agencies and organizations in existence today who can help individuals who are seeking housing assistance with poor credit history.
When it comes time to buy a home, individuals with poor credit often find themselves at a significant disadvantage. Fortunately, a variety of federal and private organizations are dedicated to assisting these individuals in every step of the home buying process, including lending.
Factors Influencing Your Credit Score
Many adults are surprised when they see their credit score for the first time. This surprise can be equal parts pleasant and frustrating. The reasons for both upward and downward fluctuations in any person's credit score are far more varied than most people realize.
As a general rule, any negative "strike" on your credit report will slowly be given less weight in the general score calculation as time passes. So, for example, if you have missed one or more payments on an asset such as your car or home and have been reported to a credit agency, you will likely see a significant drop in your credit score almost immediately. However, over the next several years your credit score will likely begin to rise again.
Late payments, which are commonly defined as payments that are more than 30 days late, will remain on your credit report for a period of seven years. While you may have had a spotless record on payments during this time, a single reported late payment will not only lower your credit score dramatically but also reduce the likelihood that leasing agents and other related organizations will look favorably on you as an applicant.
The Effect of Applying For Credit
Some financial experts have pointed out that even the act of applying for credit could have a negative impact on your credit score. This is due to the fact that the credit provider will be required to perform what is commonly referred to as an "inquiry" on your credit score. Every time a copy of your credit report is requested, this transaction is logged by the credit bureaus.
This does not mean to imply that applying for a single line of credit will adversely affect your score. In fact, applying for various credit lines over an extended period will typically have no real negative impact. However, the credit bureaus become increasingly suspicious when an individual suddenly begins applying for multiple lines of credit. Studies have shown that this type of behavior is commonly linked with personal financial trouble. This, in turn, creates a higher statistical probability of insolvency and default.
Understanding Hard and Soft Inquiries
When a credit inquiry occurs, it is commonly defined as either a "hard" or "soft" inquiry. A soft inquiry commonly occurs when credit lenders send you information in the mail regarding special offers, balance transfers, etc. and you opt to be pre-approved for those offers. When you choose to check your credit score this is also considered a soft inquiry. Employers also often perform soft credit inquiries for new hires.
These differ significantly from a hard inquiry, in which an individual consents to a credit check as part of an application for additional borrowing opportunities. Hard inquiries do have the ability to affect your credit score, although the specific extent to which they influence your score will also be determined by a variety of additional parameters. Although one hard inquiry over a period of time will most likely do very minimal damage to your credit score, repeated actions will have a more significant effect.
Credit Balances and Their Impact on Scoring
Finally, one of the more common reasons why an individual's credit score begins to decline is if they are carrying a large amount of revolving debt, typically in the form of credit cards. Credit agencies place heavy emphasis on what is commonly referred to as an individual's debt-to-credit ratio, also referred to as their credit utilization ratio. This data point provides a brief overview of how much available credit an individual has used and how much they have remaining.
Much like multiple applications for new credit lines may signal that an individual is experiencing financial hardship, an inordinate amount of credit usage will typically indicate a similar situation. When assessing your credit utilization ratio, you simply divide the amount of credit card debt you currently have by your total credit allowance. For example, if your credit line is $20,000 and you currently have used $8,000 of this, your credit utilization ratio would be 8000/20000, or 0.4. As a broad rule, credit agencies will tend to view credit utilization ratios above 0.5 with some degree of concern.
Housing Assistance for Bad Credit
In situations where you would like to apply for a home loan but have a poor credit history, you may discover that the initial terms offered to you by a standard mortgage lender are not in your favor. For example, high interest rates could cripple your ability to build your savings throughout the duration of your mortgage repayment. Fortunately, a variety of federal agencies and nonprofit organizations offer assistance to future home buyers who find themselves in this situation.
Perhaps one of the most often-used resources for homebuyers is the Federal Housing Administration, also known as the FHA. The FHA acts as a branch of the Department of Housing and Urban Development. Generally speaking, the FHA offers homebuyers the chance to purchase properties at significantly lower interest rates compared to what may be available through private lenders. This is done through collaboration with private lenders in which the FHA acts as an insurer of the loan rather than the provider.
Exploring the FHA
Since it was first established in 1934, the FHA has worked with homebuyers across the country to ensure they can secure viable payment plans for the property they wish to own. Whereas bank lenders may offer to reduce interest rates on a property in exchange for a significantly higher down payment, the FHA will typically seek to ease payment burdens on both the down payment and monthly payment rates for buyers.
Currently, the FHA will allow an individual to qualify for their assistance if their credit score is above 500. When a borrower has a credit score between 500 and 579, the FHA will typically stipulate that a 10% down payment must be made, a rate that is still far below the 20% commonly requested by private lenders. In the event that a borrower has a credit score above 580, the FHA will guarantee the loan as long as they make a down payment of, at minimum, 3.5%.
These statistics alone demonstrate just how significant the assistance provided by the FHA can be. In a situation where a borrower chooses to seek funding from a traditional bank, they will typically be required to purchase private mortgage insurance if their down payment falls below 20%. The premiums involved with private mortgage insurance can dramatically increase the size of a homeowner's monthly payment, given the fact that they will now be paying for both the mortgage itself and the insurance used to cover it.
Evaluating the Logistics of the FHA
As mentioned previously, it is important to make clear that the FHA does not provide mortgage financing for homeowners. Instead, it insures a mortgage issued by a private lender to the borrower seeking FHA assistance. With that in mind, borrowers who successfully apply for FHA assistance will still be required to apply for a mortgage through a standard lender. The borrower will also need to ensure that the lender they apply to accepts FHA-assisted applications.
Once the mortgage has been approved, the FHA will then work alongside the lender in order to ensure that the borrower receives the assistance they need to successfully complete their home purchase.
Organizations That Assist With HUD
Although the FHA programs mentioned previously are the most commonly used tool for securing housing with poor credit, a variety of nonprofit organizations work with members of the community to assist them in preparing FHA applications and understanding how this assistance could impact their lives.
An excellent example of such an organization is Operation HOPE, Inc. Based in California, Operation Hope, Inc. is a registered nonprofit that acts as a proactive force to improve the financial wellbeing of marginalized individuals across the country. Not only does this organization provide valuable resources to expand homebuyers' access to property ownership, but they also offer a variety of educational resources to help expand financial literacy for young adults. Financial professionals associated with Operation HOPE, Inc., have also been part of small business development sessions, skills training meetings and credit counseling.
Moving Ahead With Housing Assistance
Housing for people with bad credit doesn't have to be difficult to obtain, but it does require a good deal of upfront research. With that in mind, it is critical for individuals who may be considering securing this type of housing to research all of their available options as well as the appropriate "next step."With that in mind, the best possible recommendation is to either contact the Department of Housing and Urban Development directly, or a nonprofit such as Operation Hope, Inc., before beginning the mortgage application process.
This early step will help ensure that your pending application is "on the radar" for organizations who will likely be called in to assist you at a later process. Not only will this save time over the long-term, but it will also ensure that you have a powerful ally on your side from the opening steps of the process. Most importantly, both of these organizations will be available to help you address any questions or concerns you may have about either your eligibility/qualifications or the lending process in general. It never hurts to gain as much information as possible prior to initiating your loan application. These organizations provide an absolutely indispensable resource for adults of all ages across the country.