Last Updated on June 24, 2022 by Luke Feldbrugge
It IS possible to buy a house with bad credit! But under the current housing market conditions, it is much tougher. There is a chance you may need to improve some things before it can happen. Here we will provide you with what you need to know about buying a home with bad credit, what it will take to qualify for a home loan and what you can do to improve your credit to make your home buying experience a reality.
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 mortgage lending process can tell you it’s no picnic. Getting approved for a home loan can be a confusing process. 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!
1. Know Your Credit Score and Credit History
Most people only have a rough idea of where their credit score lies. Some people aren’t aware of how good or bad 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 and you should proceed carefully. We highly recommend you rely on a trusted financial institution you have used such as your credit card companies or your bank.
Consumers can get free credit report from each of the three primary credit bureaus (TransUnion, Equifax and Experian) once per year. These reports reflect your credit history. They do not provide your credit score. However, it is important to review what your credit history reports contain because mistakes do happen and they can hurt your credit score. If you do not you report a mistake on your credit history, 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.
When you decide to speak with a lender about qualifying for a mortgage, the lender will likely pull all three of your credit reports. They will review each report as part of a risk analysis to determine how risky it is to lend you money to buy a home and your ability to pay the money back.
2. Options to Buy 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 credit score of 580 or higher, you can get a home loan with a down payment as low as 3.5%. On a $250,000 home, that’s only $8,750. If you have a FICO credit score between 500 and 580, you may still qualify for an FHA mortgage loan, but you’ll need to put more money down (typically it is at most 10% down). People with credit scores below 500 do not qualify for an FHA loan. Qualifying for an FHA home loan is still dependent upon the lender and their financial risk analysis of the home buyer. They will look at much more than just your credit score, but the FHA home loan is a legitimate option if a low credit score is your concern.
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 increase your down payment.
Find a Co-Signer
A co-signer is someone who agrees to be added to a mortgage 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 mortgage. If the options above do not work out, and just need some direction, check out some of our local deals through Homes for Heroes business affiliates. We partner with some credit repair professionals. We have one national partner and a few who operate in select states.
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 specialists in your area who will guide you through the home buying process and save you money along the way. On average, our heroes save $2,400 when they buy, sell, or refinance their home. We 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
Lenders must follow all federal and state lending regulations and there are certain qualification a borrower must meet in order to receive financing to purchase a home. Due to these regulations and qualification criteria a mortgage lender may need to pass on financing a mortgage for you.
If this happens, keep working at it. Your credit history will not change over night. It will take some time to build it back up. If you follow the information provided in this post and remain diligent on repairing your credit, you can make improvements every day. It will pay off. And, eventually you will be in a position to successfully qualify for a home mortgage and purchase a home.