Does A Low FICO Score Bar You From the Real Estate Market?

FICO is the abbreviated name for stands for Fair Issac Corporation. developed a formula for predictive analysis that judges consumers ability and willingness to manage and repay debt. A high FICO score not only opens up doors of opportunity for getting loans, it also is used to evaluate the interest rate the consumer will pay on the loan. The higher your FICO score the lower your interest rate and vice versa. FICO uses information from one or all of the three main reporting agencies, Equifax, Experian or TransUnion, to computer a score based on credit behavior, according to Credit.com.

In life you can change your name, you can change your address, but you cannot change your social security number, unless for extreme circumstances such as entering the witness protection program. Your credit score is attached to your social security number. You can change your credit score by altering your credit behavior; however, this takes time. Experian.com says that a bankruptcy can stay attached to your credit score for up to 10 years. Other damaging items that lower your score are auto repossessions, late payments, and home foreclosures.

The sub-prime mortgage program was the result of less than desirable loan terms offered to individuals with no or poor FICO scores. They were able to just prove income “on paper” without proper verification. These loans also looked good on paper, but were unmanageable for many consumers who had to pay adjustable rates. These sub-prime lending practices led to the foreclosure crisis, and many consumers are still carrying the scars of home loan defaults and other negative items on their credit reports, which in turn lower their FICO scores.

Having no credit history at all works against your score as well. The best way to earn a good FICO score is to take out a loan for a necessity such as a car, and pay it off like clockwork. It’s best to avoid revolving or unsecured debt unless you have the means to quickly pay off the card.

What are your options?

Can a person with a low FICO score rent or own a home? That depends. These days, lenders carefully scrutinize loan applicants and unless you have great credit, the zero down payment and low interest rate options are out of reach.

About Money claims that there are ways to skirt around bad credit if you are serious about buying a home. The surprising facts are that you can apply for a home loan with a FHA lender as little as two years after a foreclosure, and 3 years after a bank short sale with bad credit.

A recent bankruptcy is also not always a negative. If you have taken steps to pay items like car loans on time, and have not tried to take out more credit cards, the lender can be assured that you don’t have any current unsecured debt and cannot file for bankruptcy again for another 7 years.

There are alternative “hard money” lenders, who will demand a substantial down payment of anywhere from 20 per cent or more. These loans are not guaranteed by the government, so the stakes are higher for the lender.

The best thing a consumer can do to improve their credit score, and be more likely to get a conventional loan is to pay all bills on time, don’t take out credit cards, keep steady employment for two years or longer, and save at least a 10% down payment plus 4% closing costs in case the buyer has to pay them.

Since the housing bubble burst, lenders are demanding that buyers show more good faith that they will be able to pay their mortgage. Some avenues around this is to have a parent or relative co-sign the loan, which in this economic climate is not accepted if the co-signer is not one of the purchasers of the home.

What about renting?

Even renting can be tough with a low FICO score. These days rental applications demand applicants not only undergo a criminal background check, but a financial one as well.

US News Money has some tips on how renters can get an apartment with no credit or bad credit history, in other words a low FICO score. Some ideas include getting ready to rent beforehand by cleaning up your credit as much as possible before apartment hunting. Paying your lease in advance and/or paying a much higher security deposit may get a renter into the home they want. If a person has bad credit from credit cards, but has a strong, dependable rental history, having testimonials and proof from your former landlord that you paid on time is crucial.

Also, if a person had a bad patch due to job loss, but are now securely employed in a high paying job, landlords may be willing to take a chance. Needless to say, it’s so much easier to find a choice apartment in a great neighborhood if you have sterling credit and trustworthy rental history. Applicants with poor credit history may have to live in a less desirable neighborhood, or live in a complex with little amenities. If you want the Olympic size pool, sauna, gym, concierge and doorman, you not only need to be able to pay, you need to show on paper that you can. Each adult who will be living in the home will have to be screened, not just the main breadwinner.

Landlords are only willing to relax standards if they are desperate to fill vacancies. Renters with very low income and other circumstances may qualify for Section 8 Housing, which many landlords welcome as their rental payment is guaranteed. A complex that is known for “accepting Section 8 residents” often makes the building less attractive to other residents, so the landlord’s challenge is to either increase this type of occupancy to the maximum, or have no Section 8 tenants at all.

Many millennial have problems with their FICO scores before they leave college. Credit cards are marketed to college students as a convenience, and unless mom and dad pay the bills, many graduates have to cope with dings on their credit as well as crushing student loan debt. For this reason, many young people have to move back home, and are entering into the rental/home buying market at a later age than preceding generations.