How To Buy A House With Bad Credit
If you have bad credit, buying a house can seem impossible. But it doesn’t have to be! Read on for our top tips on how to buy a house with bad credit.
Buying a home with bad credit can be done.
A credit score is a number that represents how you manage money. A lender will use your credit report to determine whether they’re willing to lend you money, they also look at the history of your payments and how much debt you have compared with your income.
If lenders think that the risk of repayment is too high, they might not make the loan or charge more interest than what was originally agreed upon. A good credit score can help convince lenders that it’s safe for them to lend money because there’s a good chance you will be able to pay it back on time with little risk of defaulting on the loan.
In most cases, people looking for mortgages with bad credit have FICO scores below 620 (out of 850). If this sounds like where you are right now, don’t despair! There are many options available when buying a house with bad credit—and we’ll go over some of those later in this article.
Why do credit scores matter?
Mortgage companies care about your credit as a sign of financial responsibility and stability. They use your score and information from the three major credit reporting agencies to determine whether you’re likely to default on a loan.
The better your score, the more likely you are to get approved for loans at favorable rates.
How are credit scores created?
Before you can understand how to buy a house with bad credit, it’s important to understand how your credit score is calculated. Your credit score is based on several factors, including the amount of debt you have and the length of time you have been repaying that debt. Credit scores range from 300 to 850 and are used by lenders to predict whether borrowers will repay their debts. If someone has paid on time for years and never borrowed money, then they will likely have a higher score than someone who has borrowed heavily but only been able to repay their debts for a short period of time.
Your credit score is based on a few main factors: payment history and available lines of credit (debt). The first factor considers how often payments are made on time; late payments negatively impact this part of your score more than anything else.
The second factor takes into consideration both overall amounts owed as well as length of time since obtaining each line of credit—the longer you’ve had an account open without an issue (or without missing any payments), the better off you’ll be when calculating this portion of your overall rating.
The third factor is your credit utilization ratio, which measures the amount of available credit you’re using on each account. In other words, if you have $10,000 in available credit and owe $2,000 on one card but pay off another with a $1,500 balance before using it again, that’s considered good because only 20% of your overall line has been used at any given time.
The fourth is the age of your accounts, which are considered in their entirety rather than individually. The longer you’ve had an account open without any issues (or without making any payments), the better off you’ll be when calculating this portion of your overall rating.
New credit also plays a role in how your credit score is calculated. 10% of your score is based on new credit applied for and new credit taken on. This is calculated through new accounts opened and applied for.
What are some loan options for people with bad credit?
- FHA loan: FHA loans are federally insured and can be more lenient with their underwriting standards. This means you can qualify for an FHA loan if your score is below 620. The minimum down payment is 3.5 percent FHA requires both upfront and annual mortgage insurance for all borrowers, regardless of the amount of down payment.
- VA loan: Veterans Affairs (VA) loans are available only to those who have served in the military. A VA loan requires no down payment and can have lower interest rates than conventional mortgages.
Find The Right Lender
Finding the right lender to work with is one of the most crucial steps in buying a home with bad credit. Not all lenders are willing to work with borrowers who have less than stellar credit, so it’s important that you find one who will help you find the right loan for your needs. In order to do this, it’s important that you ask around for recommendations from friends and family members who may have gone through similar experiences. If all else fails, try doing some research online or looking at local newspapers’ classifieds section.
A Few Tips To Improve Your Credit Score Before You Buy A Home
Here are some tips to help you improve your credit score before you buy a home:
- Check your credit report. You can get a free copy of each of the three major credit reports by visiting AnnualCreditReport.com. After you look, check for and then dispute any errors that you find. If it’s been less than 30 days since opening an account, the lender may not yet have updated their records with this information, so it’s important that you still request an update from them once it has been 30 days since opening the account; the score could be affected negatively by what appears on one of the credit reports (due to lack of history).
- Don’t open too many new accounts at once—and don’t close old ones either! Opening multiple new accounts in short succession will lower your average age of accounts and/or increase your available revolving balances (which can hurt overall scores). Closing old active accounts will cause similar results as well (but remember that closing negative ones without paying them off first will lower scores even further!).
With a little time and effort, you can improve your credit score and buy the home you want. The key is to build good habits in your finances by paying bills on time and keeping debt low. If you’re having trouble getting approved for a loan but still want to buy a house, consider talking to an experienced loan officer who can help show you other options that might work better for your situation.