Buy a House With Bad Credit in California
Most California down payment assistance programs require that you have a minimum credit score of about 640.
If your credit score is below 640, don’t worry. There are many homebuyers we have helped that started with a credit score under 640, and they were still able to qualify with the proper access to credit education and tools that quickly boosted their credit score.
Depending on your circumstance, you may need to utilize the help and expertise of a credit professional. There are a number of credit repair companies the use different strategies, offer different price ranges, and obtain different results.
We recommend Sam Parker and his team of professionals at mycreditguy.com.
Here’s why:
- They get results
- They offer free advice
- They do not charge upfront fees
- They charge a fair price for their services
- They are based in Arizona but work throughout the United States
What is a Credit Score and How is It Derived?
The loan approval process is based on the philosophy that past credit history demonstrates a buyer’s ability to pay their bills and meet credit obligations. Most banks have adopted minimum credit score requirements. That’s why it’s important to understand what a credit score is and how it is derived.
According to MyFico.com, a credit score is calculated from several different pieces of credit data in your credit report. Debt-to-income ratio, which is how much your monthly payments are (before taking out the loan). Payment history, available credit and history of your payments. This data is grouped into five categories and considers both positive and negative information in your credit report.
A credit score can range from as low as 300 to as high as 850. So how much weight do they put on each variable of information? The exact formulas are not made public, but the following components have been disclosed.
Payment History (35%)
The most important category for credit reporting agencies is your payment history. They want to make sure you pay your bills. If you make your monthly payments, your score improves, while late payment negatively affect your score. The more recent your late payments are, the worse your credit score will be.
Here is a quick list of negative facets that can significantly lower your credit score:
- Late payments over 90 days past due
- Public records such as bankruptcies, tax liens, judgments, etc.
- Collection accounts
- Charge-Offs
- Repossessions
- Foreclosures
- Short Sales
Amounts Owed (30%)
“Amounts owed” plays a large role in credit reports. To make sure you aren’t being penalized, keep balances low on credit cards and other revolving credit. Pay off debt rather than moving it around. The most effective way to improve your score is by paying down revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score. That doesn’t mean you should close unused credit cards as a short-term strategy to raise your score, or open new credit cards to increase your available credit. Both of these scenarios could backfire and lower your score.
There are two standard account types that dominate a credit report: installment loans and revolving debt accounts. Installment loans, such as car loans or mortgages, have set payments and terms. The lower the amount that you owe relative to the initial loan amount the better. Revolving debt accounts, like credit cards and lines of credit, have a greater impact on your credit score. Once your balance exceeds 50% of the credit card limit, your credit score begins to drop. The higher the debt, the greater the drop. If you are able to maintain the balance of your revolving debt accounts below 30% of their limits, your credit score will typically increases month over month.
Here is an interesting fact, if you want to increase your credit score, it is better to leave a small balance (again, under 30% of the limit) on your revolving account rather than pay it off. Credit companies like to see a good payment history. An account with a small balance and a history of on-time payments will increase your credit score, where as an account with zero balance will typically neither increase nor decrease your score. Of course, not paying off your debt creates a level of risk that you may miss a payment. And having too much available revolving credit can have an adverse impact on your credit score.
Length of Credit History (15%)
The longer your credit history, the better it is for your score. Also taken into consideration is how long it has been since you have used certain accounts, and the average account age of existing open accounts.
If you want to buy a house with bad credit in California, having thin credit and bad credit (ex. late payments or collection accounts) will make the process difficult. It will take time to repair your score.
New Credit (10%)
For new credit, the two things to consider are the number of new accounts and the number of recent inquiries that appear on your credit report. Statistics prove that opening too many new accounts in a short period of time increases the risk of default as it could lead to “spending sprees” or “debt pyramiding”. If you need to open new accounts to establish (or reestablish) credit, open no more than one account every six months and no more than three accounts in a 24 month period.
Too many inquiries in a short amount of time will have a negative impact on your credit score. Remember that you can shop for the best deal. Having multiple inquiries for the same purpose – such as shopping for a car – in a short amount of time (typically 30 days) is generally looked upon as one “hard inquiry”.
Types of Credit (10%)
Credit scoring models look for a healthy balance of installment debt, revolving debt, store charge accounts, etc. Some experts believe that the ideal mix for the best credit score is a few credit cards with relatively high limits and only a small balance on one or two of them, and an installment loan with a spotless six-month payment history. If you want to buy a house with bad credit in California, the best way to do it is to learn why your credit is bad and fix it.
