Buy A House With Bad Credit? It’s Possible!
Buying a house will require you to search for a mortgage lender that is willing to let you borrow enough money to match the purchase price of the house. The mortgage lender will run a credit inquiry to obtain your credit score and gauge how much of a risk you may or may not be.
Traditional loans usually require a credit score of 620 or higher. To get the best possible rates, you will want to have a credit score of 700 or higher, which is considered excellent credit. Unfortunately, many people only have fair to bad credit, and may not qualify for traditional loans.
If you have bad credit (a credit score below 600), you most likely won’t qualify for a traditional loan and may have trouble qualifying for other loan types. Below is vital information you need- to know how to buy a house with bad credit.
Things to consider
When buying a house while having bad credit, there are a couple of things to be prepared for:
Higher Interest Rates. It’s definitely possible to buy a house with bad credit, but one thing that will inevitably happen is that you will have to pay higher interest rates. Interest rates add a substantial amount to the overall cost of your home over time.
Larger Down Payment. To prove to your mortgage lender that you’re willing to absorb some of the risk associated with purchasing a home, often a larger down payment is required. Depending on your credit score, you may be required, at minimum, to put anywhere from 3-10% down. However, providing an even higher down payment can help reduce interest rates. Putting 20% or more down will not only lower interest rates but may also allow waiving mortgage insurance fees.
How to buy a house with bad credit
Hire a housing counselor. A housing counselor is a real estate specialist that can help you shop around for a mortgage lender that is willing to take you on, as well as provide ample education about the local housing market.
Housing counselors may require a small fee or no fee at all for consultation. Furthermore, a housing counselor may even advise that you take a homebuyer learning course, which will grant a certificate that you can show lenders, letting them know that you are a serious and educated buyer.
Get a cosigner. Some people will be fortunate enough to have a family member or trusted friend with good credit willing to cosign a loan application. As a cosigner, they will be responsible for any payment failures, and as a result, their credit is at risk by cosigning for you. Still, this is a good option if your bad credit prevents you from borrowing a mortgage.
FHA Loan. Federal Housing Administration (FHA) loans are government-protected programs that allow lower-income people to buy into the housing market. They are extremely popular among people with both bad and good credit because they require smaller down payments.
Down payments for FHA loans start at around 3%, but more money can be put down to reduce interest rates. Regardless of your down payment, however, FHA loans will always require Private Mortgage Insurance (PMI). PMI is an additional cost absorbed into your monthly mortgage payments. Overall, PMI can add hundreds to thousands of extra cost per year, depending on the purchase price of the home.
Qualifying for an FHA loan can is possible with a credit score as low as 580. Even lower credit scores may also qualify, but this happens rarely and would require a much larger down payment.
Other types of government-protected loans are the Veteran’s Administration (VA) and U.S. Department of Agriculture (USDA) loans. These loans have specific requirements.
Build your credit. It’s possible to buy a house with bad credit, however, the best way to buy a home is to increase your credit score. If you’ve tried all of the above steps and are still denied a mortgage loan, then repairing your credit is the best option.
Repairing your credit can be done relatively quickly, depending on which areas need improvement. To summarize, building credit requires that you decrease your debt, optimize your credit card utilization ratio, and make all monthly payments on-time.
Before attempting to buy a home, make sure that you do not open any additional credit cards or pull out any additional loans unless you’re positive that it will increase your credit score. Research your credit history and look for any derogatory marks that can be improved or disputed. Once you’ve raised your score by at least 100 points, you may try to apply for a mortgage loan again.