Last Updated on January 12, 2021 by Maggie Sutton
Many first-time home buyers think that the hardest part of purchasing a home is finding the right place to live. But anyone who’s gone through the lending process can tell you otherwise.
Getting approved for a home loan is a confusing process under the best conditions. But getting approval with a low credit score can feel next to impossible. If you’ve been thinking about buying a house but have less than stellar credit, there’s no reason to give up hope. There are still ways to get a home loan with bad credit. In fact, you may already qualify! Here’s everything you need to know about buying a house with bad credit.
1. Know Your Credit Score
Most people only have a rough idea of where their credit score lies. Some people aren’t aware of how bad or good their credit really is until they attempt to qualify for a loan. So, the first thing you need to do is to find out where you stand by checking your actual credit score. Many banks, credit card companies and other credit services companies can provide your score.
If a website or service requires you to pay for your credit score information, it is most likely a scam. Consumers have the right to know their credit scores for free. In fact, there are three distinct credit bureaus (TransUnion, Equifax and Experian), each with their own separate criteria. Your overall credit score is an average of the three.
By law, you can contact each bureau and request a credit report free of charge once each year. While these reports won’t contain your credit score, they’re still important because mistakes in credit histories may be more common than you’d think. However, unless you report that an issue is there, no one will know to remove it. That’s why it’s so important to review your credit report and fix any inaccuracies.
While removing incorrect information may not drastically change your rating, every little improvement helps. The longer misinformation remains, the worse your credit score stays. Experts recommend monitoring your credit history regularly to keep your credit report accurate.
2. Option for Buying a House with Bad Credit
Once you know what you’re up against in terms of your credit score, it’s time to weigh your options. Thankfully there are several ways you can still buy a house with bad credit. Some strategies you should consider include:
Backed by the Federal Housing Administration (FHA), these loans are designed for first-time buyers and those with poor credit. That’s because FHA loans come with fewer restrictions and are more accepting of those with low credit scores. In fact, if you have a FICO score of 580 or higher, you can get a home loan with a down payment as low as 3.5%. If you have a FICO score between 500 and 580, you can still get a mortgage loan, but you’ll have to put at least 10% down. People with credit scores below 500 do not qualify for an FHA loan.
Make a larger down payment
Sometimes making a larger down payment on a house is enough to overcome a bad credit score and secure a loan. That’s because a larger down payment decreases the risk for the lending agency. This may not always be possible, but if you are initially denied a home loan, talk with your mortgage specialist and see if they are willing to approve a loan if you pay a little extra up front.
Find a co-signer
A co-signer is someone who agrees to be added to a home loan and take responsibility for that loan, but who will not have any actual rights to the property. This represents a significant financial risk to the co-signer should you be unable to make your loan payments. But it can help you buy a house with bad credit because the lender will look at their credit score and income in addition to your own, making you more attractive as a borrowing team.
Work with Homes for Heroes
Homes for Heroes is dedicated to helping heroes save money and get the home of their dreams. That includes helping heroes who have bad credit secure a home loan.
If you work in one of our hero professions — law enforcement, firefighters and EMS, military, teachers and healthcare professionals — simply register online. You’ll be automatically matched with a real estate specialist in your area who will guide you through the home buying process and save you money along the way. We also partner with mortgage specialists across the country who are dedicated to helping heroes as a thank you for all that you do for our communities. They can work with you to find a home financing option that works for your unique situation.
3. Rebuild Your Credit, Improve Your Score
If you’re trying to buy a house with bad credit and the strategies listed above don’t work, you may need to bring your credit score up before submitting another loan application. There are a number of ways you can improve your credit score, and some take more time than others. As we mentioned above, start by reviewing your credit history report and fix any inaccuracies that may be hurting your score. After that, consider taking these steps:
- Build your credit history by making small purchases on a credit card and pay them off immediately
- Pay off your debt if you have other loans
- Always pay your bills on time
- Pay down your credit card debt and keep your balance below 30 percent of your available credit limit
- Open a new line of credit, but only if you plan on using it long-term
- Don’t close existing lines of credit
- Use a credit repair service like the Credit Law Center
4. Mortgage Lender May Say No
If you’ve tried these tips and still can’t seem to qualify for a home loan, there may be something that you are missing. Register with Homes for Heroes and we can find a financial expert who can review your situation and discuss all your best options. We will do everything we can to make buying a house with bad credit a possibility for heroes like you.
Have bad credit but still want to buy a house? Register with Homes for Heroes and start your home buying journey today.