For most people, buying a house is a challenge. Between the paperwork, finding the right home, and matching up with a lender, it is time-consuming at best. However, it is far more difficult for those buying a house with bad credit.
About 28.5% of Americans hold credit scores below 670, which falls into the “fair” or “poor” categories. This means you are not alone. Learn how to get a mortgage with bad credit and tips you can use to boost your credit before reaching out to a lender.
KEY TAKEAWAYS
- You can buy a house even if you have bad credit.
- There are several programs available to borrowers looking for bad credit home loans.
- Improving your credit score can go a long way towards improving your home-buying odds.
How to Buy a House with Bad Credit
The best thing to do when you are looking to buy a home, and you know your credit is not great is to start with research. Look at what lending institutions around you offer in terms of programs. If that won’t work, look at what you can do to put yourself in a better light with lenders.
Check for Better Rates
Your credit score impacts your interest rate. When you have a higher credit score, you receive a lower interest rate, resulting in lower payments. Check your credit report. Identify mistakes in your credit report and file disputes to raise your score.
Find a Co-Signer
Your loan application improves with a cosigner who has good credit standing. Your loan qualification depends on your co-signer’s credit score. The co-signer takes on payment responsibilities when you fail to pay.
Get More Cash to Put Down
Lenders take on less risk when you make a more significant down payment. When your down payment is more significant, you increase the likelihood of loan approval because it lowers the lender’s risk. Build up your savings before you apply.
You can also learn about downpayment assistance programs. There are programs in nearly every state that help you have more money available for your downpayment.
Research Programs to Help Buyers with Bad Credit
The government offers programs for first-time homebuyers, often with relaxed credit requirements. Find out if your situation qualifies you for one so you can start the home-buying process.
Types of Bad Credit Home Loans
Thankfully, several types of loans can help people from all credit backgrounds. If your credit has taken a few hits, these types of home loans for bad credit could be the answer you are looking for. Here are some of the loan types that may help.
Conventional Loans
Conventional loans do not receive government backing. Some may have stricter credit requirements, but the lenders decide their specific criteria for who they lend money. Some lenders provide options even to borrowers with low credit scores, but usually, credit scores cannot be lower than 620.
First-Time Homebuyers Programs
These programs vary by state. Through these programs, first-time homebuyers receive support when purchasing their first home. Buyers can receive down payment assistance and are often eligible with lower credit scores.
VA Loans for Current and Former Veterans
The Department of Veterans Affairs provides backing for VA loans. Favorable loan terms are available to veterans and their family members. Most VA loans have no credit requirements and veterans qualify no matter their credit score at that time.
FHA Loans
When learning to buy a house with bad credit as a first-time home buyer, many turn to FHA loans. The Federal Housing Administration provides insurance for FHA loans. Qualification might be possible even with a credit score of 500.
Lower credit scores require a higher downpayment of 10%, but borrowers are often accepted into the program if they meet some basic requirements. A credit score of at least 580 is all it takes to change the downpayment requirement from 10% to 3.5% of the purchase price.
USDA Home Loans
The United States Department of Agriculture backs USDA loans for many rural homes. They offer flexible credit guidelines as long as the home meets their criteria for location and amenities.
How to Improve Your Credit Score Before Buying a Home
You should improve your credit score before purchasing a home with bad credit. When your credit score rises, better interest rates and loan terms become available, resulting in substantial savings throughout your mortgage. The results you achieve from this process justify the time and effort you put into it.
Understand Your Credit Report
Begin by obtaining your credit reports. You can get free copies from all three major credit bureaus: TransUnion, Experian, and Equifax. Examine all reports for errors, such as incorrect personal data, account balances, or unfamiliar accounts.
Pay Bills On Time, Every Time
Next, you need to make sure to pay all bills on time. Your payment history has a significant effect on your credit score. Avoid missing due dates by setting up automatic payments with your bank’s bill pay service or creating phone reminders.
Essential payments, like rent, mortgage bills, utilities, and credit card payments, should always come first in your financial plan. Regularly making payments on time helps you establish a solid credit history.
Reduce Your Credit Utilization
Credit utilization measures the portion of your available credit you’re actively using. With a credit limit of $1,000 and a balance of $300, your credit utilization is 30%. Financial specialists advise maintaining utilization under 30%, with 10% optimal.
When utilization rates are high, it indicates potential financial distress to lenders. To start, focus on paying off credit cards with the highest interest rates. Then, as you pay one bill off, you can use the money to pay off the next highest-rate bill.
Manage Your Debt Wisely
Always try and manage your debt carefully. Do not open several new accounts simultaneously because applying for new credit could temporarily lower your credit score.
Ensure you request credit only when it is an absolute necessity. You can also get approved for a personal loan to consolidate your debt if that makes managing your payments more manageable.
Keeping your old accounts open, when possible, prevents the reduction of your credit history length, which can harm your credit score. Closing open accounts lowers your credit utilization, decreases your credit history, and makes getting loans more difficult.
Build a Positive Credit History
Finally, you can request permission to become an authorized user on the credit card of a trusted friend or family member with excellent credit. When you become an authorized user, the credit bureaus will receive a positive payment history from the authorized card.
People with little credit history or low credit scores should consider applying for a secured credit card. These cards require users to make a cash deposit to serve as collateral, but they help build or rebuild credit.
FAQs About Home Loans for Bad Credit
What Is Considered a Bad Credit Score?
A credit score under 670 tends to fall into the bad credit score category. Your chances of getting loan approval decrease, and you might face increased interest rates.
Borrowers with lower credit scores represent a more significant risk, according to lenders who might either decline to lend or raise interest rates to compensate for this risk.
Can I Obtain a Mortgage if My Credit Score Is 500?
You can still get a mortgage even if your credit score is 500. The Federal Housing Administration (FHA) ensures that FHA loans help people with low credit scores purchase homes. FHA loans provide less strict credit qualifications than traditional loans.
Can I Declare Bankruptcy and Wipe My Debt to Buy a House?
Bankruptcy ruins your credit for a significant period after the process ends. While you can wipe your debt out, it also wipes out any good strides you have taken. Getting your debt wiped off, or discharged, is not what you want to do if your goal is to buy a home.
What Down Payment Amount Is Required When I Have Bad Credit?
The amount you need to put down as a down payment depends on the type of loan and which lender you choose. FHA loans offer borrowers with lower credit scores the opportunity to make down payments of as little as 3.5% with a 580 score or higher.
If your credit score is 500-619, FHA lenders often require a 10% down payment. Your loan approval likelihood rises when you make a more significant down payment. Saving money for a larger down payment might enable you to obtain a lower interest rate for your loan.
How Can I Boost My Mortgage Approval Odds When I Have Poor Credit?
Your approval odds will rise if you take additional actions beyond working on your credit score. These include:
- Increasing your down payment
- Reducing your debt-to-income ratio
- Getting pre-approved for a mortgage
- Choose to work with a lender known for specializing in bad credit loans
Submitting comprehensive financial records, including income and expenses, can show lenders that you have a stable monetary standing.
How Long Does It Take To Rebuild Credit?
Rebuilding credit takes patience and effort, but small steps can lead to big improvements over time. Timely bill payments, paying down debt, and avoiding new credit applications are essential for rebuilding credit. The time required to achieve significant credit improvement varies depending on the type of credit problems and your corrective actions.