Buying a home with bad credit is a tough climb, but it is doable.
There is no doubt that bad credit can be a big deal when buying a home, given the amount of money at stake and the amount of extra money it takes to buy a home with bad credit. .
Unfortunately for Americans with bad credit, life’s most important purchases – like a house, car, or college – require exceptional credit, not only to qualify for loan financing, but also to earn mortgage rates. lowest possible interest and save money on the loan.
Having bad credit makes this task much more difficult. But with a double dose of discipline and ingenuity, you can still buy a home with bad credit and work on building your credit score from there.
The challenges of buying a home with bad credit
There are a myriad of obstacles in your way when trying to buy a home with bad credit. It’s a tough list to look at, but knowing the challenges ahead gives you a roadmap to buying that home, toxic credit or not.
These will be among your biggest challenges:
Lenders rely on your credit score to assess you as an investment risk
Mortgage lenders rely heavily on credit scores to determine your creditworthiness before approving a home loan.
The formula for this determination is simple and is based on calculations and rankings created by Fair Isaac Corp (better known as FICO FICO).
FICO Credit Ratings ranging from 300 to 850, 300 anchoring the lower echelon of health credit score and 800 being the highest credit score range.
Your credit score is based on a combination of personal financial characteristics, such as your ability to pay off your debts on time, the amount of debt you have accumulated, your combination of credit accounts, and any negative information related to your name from lenders and creditors. .
If your credit score is 600 or less, mortgage lenders will likely consider you to be at high credit risk and may either categorically refuse your mortgage or approve the loan, but only with a very high interest rate, which makes the house much more expensive.
You won’t get the same breaks as a buyer with a better credit score
Homebuyers with strong credit scores get breaks that buyers with lower credit scores likely won’t.
For example, a buyer with a good credit score (say 700 or higher) is unlikely to have to invest a lot of money in the house upfront, in the form of a down payment. In this case, a 5% or 10% down payment will do the job, depending on their strong debt repayment history.
A home buyer with a low credit score does not benefit from this treatment. A buyer with a credit score of 590 is expected to generate a higher down payment (20% is a common goal) to even begin qualifying for a home loan.
You will pay more in closing costs
Home buyers with little or no credit typically have to pay more in closing costs, if they are lucky enough to get a loan in the first place.
In addition to the conventional closing costs attached to a new mortgage contract, buyers with low credit may have to put money aside in the form of mortgage insurance, so lenders have a line of defense if the borrower defaults on the mortgage.
The amount of money is usually tied to the monthly loan payment – the lower the credit score, the more a low-credit buyer will have to set aside the value of months of payments.
You may need to take additional education steps to qualify for a loan
Some lending institutions may require low-credit or no-credit homebuyers to take an approved homebuyer training course – and you’ll still need to offer that larger down payment.
Use these tips to buy a home with bad credit
Okay, with the headwinds of bad credit out of the way, let’s flip the script and lay out a plan on how you can buy a house with bad credit.
Again, this is a difficult task, but it is doable.
You already know the obstacles that lie ahead, and there is an advantage in buying a home with bad credit. The trick is to take that knowledge and build from there, doing the things you need to do to clear the way and get that “approved” stamp on your mortgage.
The following tips can take you home – literally:
1. Aim for an FHA loan
A loan from the Federal Housing Administration (FHA) in the United States has no minimum credit score requirements and offers several options for buying a home with a low down payment. So a FHA loan is the holy grail for home buyers with little or no credit.
Note that not all private lenders will go ahead with an FHA insured loan (although many will), so be sure to do your due diligence with any mortgage lender and make sure your lender supports FHA loans.
2. Aim for flexibility
The search for a qualified lender is constrained by bad credit, but there are good candidates.
Remember what to look for in a lender who can handle a buyer with bad credit. You want a lender who will not only overlook toxic credit, but also handle FHA insured loans and not charge you expensive fees, based on your credit score.
Every lender you meet will have credit score criteria, so there’s no getting around that.
But some mortgage lenders are more flexible on credit scores than others, and it’s up to you to find them. Start with a good reliable online mortgage lender platform like LendingTree.com, or Rocket mortgage Quicken Loans, both of which provide access to multiple loan options for consumers with little or no credit, and where borrowers with bad credit can earn a break or two on loan terms.
3. Improve your credit score
Yes, improving your credit score is obvious advice toward a low credit mortgage, but that doesn’t mean it’s unimportant. Booster your credit rating is very important and can greatly increase your chances of landing a good mortgage deal.
That’s why it’s always a good idea to check your credit score with the three major credit bureaus (Experian (EXPGIE) , Equifax (EFX) – Get a report or Transunion (TRU) – Get a report) well before you begin your actual search for a mortgage. Six months in advance is a good rule of thumb – it gives you plenty of time to improve and achieve a better credit score.
You can check your credit for free on annualcreditreport.com.
When you receive your report, scan and check for any errors and report any discrepancies to the credit bureau that listed the information. Look for areas of score growth opportunities, like dealing with old debt and paying off new debt – always – on time.
These are your best options for quickly improving your credit score and positioning yourself for a great mortgage deal.
4. Save for a good down payment
If you can get an FHA approved mortgage, so much the better. This will pave the way for getting a home loan without having to break the bank by building a 20% down payment.
That said, it’s always worth building up a big down payment. First, it attracts more lenders who like borrowers with a big down payment, and the more lenders you have in a home buying scenario, the better your deal will be.
Also, the more money you put into a down payment, the less you will have to pay on the total cost of your home.
For example, the difference between 5% down payment on your home and 20% can translate into tens of thousands of dollars in savings because your mortgage principal and loan interest will both be lower with a down payment. high fund.
5. Aim for a cheaper house
The lower the total cost of a home, the more likely you are to get a mortgage with bad credit. The math here is in your favor, as a lender will be more willing to take a chance with a low credit borrower at $ 100,000 than $ 300,000.
Therefore, aim for a cheap starter house can not only increase your chances of getting a mortgage, once you get approved, but it also allows you to move in, improve your credit, invest in your home, and watch it appreciate.
It will also teach you home maintenance lessons that will improve your home value appreciation skills down the road.
Additional ‘helping’ factors
Home buyers with bad credit can also enter new property by thinking creatively and taking advantage of alternative home loan opportunities.
For example, if you are a military veteran, you eligible for a veterans loan, a home loan guaranteed by the US Department of Veterans Affairs. These loans do not require any down payment and come with relatively low interest rates.
Or, if you live in a rural area, the US government may offer you a USDA insured loan through the US Department of Agriculture. They also don’t need a down payment and the mortgage you get through the USDA has to go towards purchasing a primary residence.
Don’t let bad credit hold you back
While bad credit is certainly not advisable in a personal financial scenario, you can still buy a home with bad credit if you know what to do and where to look.
Follow the tips above to get a mortgage that’s right for you and paves the way for a stronger financial future – a future where you have a great place to live, raise a family, and connect with a great community.