Many people wonder how to buy a house with bad credit. It might seem impossible at first, but it is actually possible to purchase a house with a bad credit score.
Whether you are a first-time homebuyer or a current owner looking to sell, the finances of buying a house can be challenging.
Lenders look at your credit score and credit history to determine if you are a risk. Always check with lenders before you do the transaction.
Home buying may be especially difficult if you have
poor credit. Oftentimes, the lower your credit score, the higher the mortgage rates you can expect from a conventional mortgage. If you’re looking to stop renting and buy a home, but have less than stellar credit, don’t give up hope.
Although buying a home with bad or poor credit will present its challenges, it’s not impossible. There are still ways to get a mortgage loan and affordable mortgage payments.
Buying a house can seem overwhelming, and throwing bad credit on top of that can feel downright daunting. However, there are bad credit loans that can help lift some of that anxiety off of the home buying process.
Here is a breakdown of how to buy a house with bad credit:
Credit Scores
Your credit score is a three-digit number that represents your credit risk. The higher your score, the lower the risk you are to a lender. Your credit history is a detailed account of your credit activity.
Knowing your credit score is the first step to buying a home, especially when it comes to how to buy a house with bad credit. The first thing you should do before a mortgage application is to get your credit report from
all three of the main credit bureaus (Equifax, Experian, and TransUnion). The credit bureaus examine several aspects of your credit, including your credit cards.
All use slightly different metrics and option to measure your score. You may see a slightly different number from each bureau, though they’ll likely be in the same general range. Also, don’t forget to check your credits, make sure there are no errors.
Types of Credit Score
Here are credit score ranges from lowest to highest:
500-579
This type of credit score indicates bad credit categories. It is categorized as poor credit scores. If you have a 579 credit score, it is likely that you have experienced
credit difficulties in the past or that you do have a bad credit history.
You can technically qualify for a mortgage with a credit score as low as 500, but you’ll be limited to a loan insured by the Federal Housing Administration (FHA loan). With a credit score from 500 to 579, you’ll need a down payment of at least 10% for an
FHA loan.
The types of lenders assigned will also be different in each score. The lender will also likely want you to pay off any outstanding collections and judgments before you’re approved.
580-619
580-669 Fair credit score or FICO range in the USA is labeled as fair good credit score. The percentage of Americans in that range is
17%. In other word, -699 Fairly Good Credit Score.
You might qualify for an
FHA loan with a down payment as low as 3.5%. If you are a veteran, you could qualify for a VA Loan, a mortgage guaranteed by the Department of Veterans Affairs.
620-699
Now your home loan opportunities will increase. You may qualify for a conventional loan, which isn’t backed by a government agency like the FHA or VA,
with a minimum credit score of 620.
700-850
Good credit scores range from 700-to 749. But if your score range falls between 750 and 850, you are considered to be in the “great” range.
In this credit range, lenders are more willing to offer you a mortgage. When you have a credit score of 740 or higher, you will find much lower interest rates available to you.
Types of Loans
There are a few different avenues and terms you can take when considering a mortgage with bad credit. Some mortgages are actually specifically built for people with bad credit scores. Here are the most common for those who need help.
FHA
FHA loans – an acronym for the Federal Housing Administration- are backed by the Federal government. Topping off our list with the lowest credit score requirements of any major home loan application, FHA is often offered by lenders to people with a credit score of 580 or higher, with 3.5% down.
If your score is lower than 580, you still have a chance at an FHA mortgage with at least 10% down. But you might find most lenders won’t offer this mortgage to those with a score lower than 500.
An FHA loan does require that you pay mortgage insurance, also known as a mortgage insurance premium, throughout the lifetime of your loan. Mortgage insurance benefits the lender because it insures you against the chance that you stop making payments on your loan. You should look up
the mortgage insurance premium on FHA loans to find out what extra expenses this will tack on.
The upside to the insurance premium on an FHA loan is that you won’t necessarily pay a higher interest rate because of your credit.
VA Loans
Backed by the Department of Veteran Affairs, VA loans are available to veterans, service members, and some eligible spouses and military-affiliated borrowers. L
enders are more likely to approve them. It does not require a down payment and has a lower interest rate than conventional loans.
VA loans don’t have risk-based pricing adjustments. Applicants with low scores can get rates similar to those for high-credit borrowers, but your home must meet specific standards to qualify. Also, while there isn’t a specific score you need to qualify for the loan,
you will need around 580 to be eligible for a VA loan through most lenders.
USDA
Backed by the U.S. Department of Agriculture, USDA mortgages are offered to increase homeownership in rural areas.
To qualify for a USDA loan, you must buy a home in a qualified “rural” area.
These housing and urban development loans offer mortgage assistance for those with low-to-moderate income in eligible rural areas. There’s no PMI, down payment, or credit score requirements, yet lenders look at other parts of your financial history, and you can’t make more than 15 percent above the median household income in the area you are purchasing in.
Freddie Mac Home Possible
First-time buyers with a minimum credit score of 620 are eligible for Freddie Mac’s first-time homebuyer program. Home Possible can assist someone with a very low to low income to achieve their dream of owning a home. Home Possible helps buyers get into homes with a very low down payment
(3 percent) and moderate credit.
Fannie Mae HomeReady
You don’t have to be a first-time homebuyer to qualify for HomeReady. Instead, this program is geared for low- to moderate-income borrowers, with expanded eligibility for financing homes in low-income communities.
With its 3% minimum down payment requirement, this loan type has another promising feature; the loan can include income from other people in your household, regardless of their credit history.
Making this loan even more obtainable for low-income families, HomeReady bases your debt-to-income ratio on your monthly income as well as your co-borrower’s income, The DTI ratio can include the income of your roommates, adult children, or parents who happen to live with you.
Non-Qualified Mortgage
Non-QM or Non-qualified mortgages were designed by the federal government and engineered to create safer loans by prohibiting or limiting certain high-risk mortgage products.
There are non-QM loans available to those whose credit scores are as low as 500. It is much more likely that
you will get a loan from an FHA-Approved lender if you have a FICO score of 580 or higher. If you’re looking for one of these loans, check out the specialty mortgage programs and content. Some lenders offer that aren’t government-backed.
Tips to Help You Qualify for a Home Loan
Check Your Credit Score
First things first, find out exactly what you are working with. Pulling your credit report from all three bureaus, and going through them thoroughly will help you understand your missteps in your financial journey so that you can work toward correcting them.
Make sure all the information is correct. If you see any errors or something that doesn’t look familiar, address it immediately, so that you can remove any unexpected dings when applying for a mortgage.
Improve Payment History
Once you’ve evaluated your credit reports, get to work on budgeting your finances so that all of your payments are up-to -date, and your debt to income ratio starts working its way down.
Even if your score doesn’t get quite to where you want it before you apply for a mortgage, lenders can count your on-time payment history as good faith toward your new home loan.
Save Up For a Down Payment
Cash is king. Many of the loans offered above for individuals with bad credit require a down payment, and even if they don’t, your low credit score is less likely to count against you when you have a lump sum of cash to put down and reduce the total cost of the loan.
Shop Around
Make sure to exhaust all of your options before deciding on a lender. Taking out such a sizable line of credit shouldn’t be taken lightly. Although big banks and government programs are the most popular options, don’t discount credit unions and other mortgage lenders, but always compare rates before you sign on the dotted line.
Conclusion: How to Buy a House with Bad Credit
Private lenders are not the only place to purchase loans for your home. Ideally, focus on improving your credit score before house hunting. However, you can also search for FHA-Approved lenders and some other loan types above. While improving your credit score should be a priority, now you know how to buy a house with bad credit as well.
