Buying a house with bad credit may be difficult. Even if you have a good income, you’ll encounter several challenges. But don’t worry, you have options. In the meantime, find out your best home loan options if you have a less than stellar credit.
If you’re planning to buy a house with bad credit, rest assure that your options are not limited.
You have a few options, really.
Either you postpone your home purchase and work on raising your credit score. Or, you try your hands at an FHA loan, which requires a lower credit score.
Either way, there are options available to you. Here are some ways to increase your chances of buying a house with bad credit.
What is considered a bad credit score for the purposes of buying a house?
A poor credit score, according to Credit Sesame, is any score in the range of 300 and 640. With a bad credit like that, you’ll still be able to buy a house, like with an FHA loan.
But you’ll get hit with a higher interest rate, which means that you’ll have to pay a lot of money in interest over the life of the loan.
The challenges of buying a house with bad credit
You will encounter several challenges when trying to buy a house with bad credit. But knowing those challenges will allow you to make a smarter decision.
Lenders see you as a risk
When trying to buy a house with bad credit, lenders see you as a risk.
Credit score plays a major part in the lender’s decision on whether or not they will approve your loan. They consider how you handled your finances in the past (whether you paid your bills on time) as an indication of how you will do in the future.
The better your credit score, the lesser risk you will be to them.
In reverse, a bad credit makes it difficult for lenders to know if they can trust you to borrow a large amount of money.
Bigger interest rate
While it is possible to buy a house with bad credit, know that you’ll likely get higher interest rates and repayments than someone with a better credit score.
In other words, having bad credit can cost you thousands and thousands of dollars in saving over the lifetime of your loan.
How to buy a house with bad credit
A bad credit score should not stop you from buying a house. While it will be impossible to get approved for a conventional with bad credit, there are many alternatives available to you.
For example, the FHA loan program, was created just for that — for those potential home owners with a less than stellar credit score.
Here’s how to buy a house with a bad credit score:
1. Get a copy of your credit report.
Before buying a house, the first thing you need to do is to check your credit score. This is important, because you want to make sure your credit score can get you qualified for a lower credit-score-loan.
The worst thing you can do is applying without knowing where you stand. For one, your loan application might get rejected due to a very, very bad credit score.
By law, you are entitled to get a free credit report for free once a year at AnnualCreditReport.com. The report will be from each of the three credit bureaus (Equifax, Experian, and Transunion).
To verify that it is you, you will have to provide your name, social security number, your address, etc. Once you get the reports, review them for any errors. If there are mistakes or inaccuracies, file an Equifax dispute or a Transunion dispute.
The problem is however, the reports from Equifax, Transunion and Experian will not contain a credit score.
However, there are companies out there that can give you free credit report. Sites like Credit Sesame will give you a credit score and will monitor your score for you.
2. Save for a down payment
You will need a down payment to buy a house, regardless of whether you have bad credit or not.
The higher the down payment, the better your chance of getting approved for a mortgage loan.
A conventional loan requires at least 20% down payment. If you can come up with that much money, that’s great because you’ll save a lot of money in interest over the life of the loan.
But nowadays, you can pay less than 20%. The catch is, however, you will have to pay private mortgage insurance (PMI) — which is essentially an insurance for the lender in case you default on the loan.
Related: How to Save for a Down Payment Fast
3. Apply for an FHA Loan
If you’re thinking of buying a house with bad credit, you might think that you are automatically ineligible for a loan, but that is not necessarily the case — you can still qualify for a loan.
In fact, the federal housing administration (FHA) program was created for low income individuals with bad credit scores. Most first time home buyers can get buy a house with an FHA-insured mortgage loan with a credit score as bad as 580.
Another great benefit is that you only need to come up with 3.5% down payment. Those two requirements are what make FHA-backed loans very popular among first time home buyers.
However, if your credit score is lower than 580, you still can get qualified but you will have to come up with 10% down payment as opposed to 3.5%.
Keep in mind, however, that if you’re buying a house using an FHA loan, you will have to pay private mortgage insurance for the life of the loan. You can avoid that by putting 10% down payment as opposed to 3.5%.
Regardless, an FHA loan makes buying a house with a bad credit a reality.
4. Veteran Loan (VA Loan)
With a VA loan, not only can you buy a house with bad credit, you also put no money down. If you’re a first time home buyer, this is such a good deal.
If you’re a member of the military, you can qualify for a VA loan. Like the FHA loan, because the government backs these loans, they have less stringent requirements.
Specifically, there is no standard required credit score for a VA loan. So it’s up to each individual lenders. But typically, lenders prefer borrowers with at least a 620 credit score. So, you can be qualified to buy a house even if you have a less than perfect credit.
Also, there is no money down payment for VA loans.
5. Programs for buying a home with bad credit
Another way to buy a house with bad credit is to look for programs that assist people with poor credit.
So check your individual state, city or local government agency for such programs.
For example, the Department of Housing and Urban Development has a list of local state home buying programs.
If you live in Illinois, for example, and need assistance buying a house with bad credit, you may be qualified for these programs:
- Community Housing Association of DuPage
- City of Chicago, Department of Housing
- City of Aurora’s Down Payment Assistance
- Village of Oak Park’s Homebuyer Program
6. Find lenders who are more flexible on credit scores
Whether you decide to buy a house with bad credit or hold off on buying a house to build a positive credit first, getting approved for a home loan depends on your unique situations.
While yo may not meet the requirements of one lender, there is still hope. You just have to know where to look.
In fact, there are mortgage lenders who will be willing to seek your application. A good and reliable online mortgage lender is LendingTree.
LendingTree is an online platform that connects you to several mortgage lenders without visiting a dozen bank branches.
LendingTree will provide you up to 5 loan offers from multiple lenders for free, so you can compare and make sure you get the best deal.
7. Find lenders who specialize in bad credit home loans
Just as there lenders who are more flexible on credit scores, there are also lenders who specialize in bad credit home loans.
However, keep in mind that these lenders charge high interest rates in return.
Besides your credit score, lenders also look at other factors such as your income.
If you make good income and show a willingness to improve your credit score, they’ll be more willing to work with you.
But there is only one way to find your home loan options to buy a house a house with bad credit: shop around!
8. Raise your credit score
If you see that you can’t buy a house due to a bad credit score, don’t lose hope just yet. Buying a house can still be a reality.
The best thing you can do is to postpone your home purchase while you work on raising your credit score.
Credit is not stagnant. It will continue to be recorded. Therefore, you always have a chance to improve it. There are multiple steps to take in order to improve your credit score.
One way to increase your credit score is to pay all of your bills in full and on time. Doing so will give you a track record of being responsible with your debt. Payment history accounts for 35% of your total credit score. It is in fact the most important factor in computing your credit score.
Another way to raise your credit score is to keep your credit card balance under 30%. Credit utilization accounts for 30% of your total credit score–the second highest factor. So your credit card balance should always be at or under 30% of your total credit.
Lastly, keeping your credit inquiry to a minimum can help you improve your credit score. In fact, too many credit inquiries might cause a credit score drop. So limit that to 1 or 2.
One thing to keep in mind is that your credit score will not be improved overnight; it’s not a quick fix. But with discipline, persistence and patience, it will certainly be improved. If you get started improving your credit score now, you will be in a much better shape and receive a much better mortgage than you would have otherwise.
Can you buy a house with bad credit? The answer is resounding yes. But it will be difficult. However, these steps mentioned above can give yourself the best chance of getting approved for a loan with a bad credit score.
Speak with a Financial Advisor if you need help buying a house with bad credit
You can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house with bad credit, planning for retirement, saving, etc). So, find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.