Buying A Home With Bad Credit

If you’ve been worried about buying a home because of financial mistakes in your past, don’t put off the dream any longer. Homeownership is still possible, even with bad credit. Whether you are a first-time homebuyer wondering if your credit history is solid enough to get a mortgage or you need a bigger space for your growing family but you let your credit get out of hand, this guide will help you understand the truth about buying a home with bad credit.

Realize What Bad Credit Really Means

There are two different ways to approach the term "bad credit." The first is your own idea of what bad credit is, and the second is what lenders consider bad credit. You might think that making one late payment on your car note has destroyed your credit or that having student loan debt shows you can’t afford expensive purchases. These are just perceptions and don’t necessarily dictate what a lender views as poor credit.

Your credit score is determined by a number of factors, but the higher the number, the more favorable you look to lenders. A high credit score can be in the range of very good to excellent, with the score ranging from 740 as very good up to 850 for perfect credit. On the other hand, lower scores in the opposite direction range from good to fair to poor. A score in the range of 300 to 579 is considered poor, while 580 to 669 is considered fair.

Lenders have their own specific score requirements for home loans, but generally, the minimum required score is 500. For some, the threshold is a little higher with the range being 580 to 620 or higher. Lower scores indicate bad credit, usually because of late payment, non-payment or a debt-to-income ratio that is too high.

However, credit scores are just one thing a lender looks at when reviewing a mortgage application. The score offers a basic glimpse of your credit, but it doesn’t really present the history of different experiences or situations that accompany each item on the report. Lenders also look closely at your income, your employment stability, the price of the home being purchased and your debt-to-income ratio.

Determine Your Buying Options With Bad Credit

A low credit score doesn’t mean you have to put off the dream of homeownership. There are plenty of options available for low rates, lenders and reduced down payments if you know where to look. These are some of the choices you have when working with a low credit score.

FHA Loans

The Federal Housing Administration offers loans to those with credit scores as low as 500, and there are some provisions where potential buyers can still be eligible without any credit score or credit history. The FHA program is the original mortgage option for bad credit, as it’s a federally backed program offered through traditional lenders. If your credit score is at least 580, your down payment could be reduced to just 3.5%.

Homebuyer Assistance Programs

Depending on where you live, your state may offer local or state-based assistance programs. These programs are designed to help single or low-income buyers, and they often maintain the credit score minimum that corresponds to the lender used for the mortgage. Many programs offer grants or scholarships for first-time or low-income buyers that can help with the down payment requirements of a loan. Higher down payments are one of the unfortunate possibilities when applying for a mortgage with bad credit.

VA Loans

The Veterans Assistance loan program offers mortgages without a down payment requirement for veterans or active-duty military members. However, there is a minimum credit score of 580 required for applicants at the time of purchase.

USDA Loan

The United States Department of Agriculture has special loan options for those who live in lower-density suburbs or rural locations across the country. The USDA subsidizes the loan, and there is a zero-down payment mortgage available for those who qualify. The program does require a minimum credit score of 620 from home buyers.

Conventional Loans

The federal government also backs mortgages through its Federal Housing Finance Agency. Conventional loans as these generic mortgages, and the FHFA backs a large percentage of all mortgages in the country. For these loans, home buyers are required to have a minimum credit score of 620 and make a 3% down payment.

Work To Repair Your Bad Credit

Though it’s possible to buy a home with bad credit, it’s much more affordable when you purchase a home with great credit. The good thing about your credit score is that there is ways to change it. Scores fluctuate according to certain behaviors, and some small changes could make a big difference in your lending options. If you’ve been thinking about buying a home, give yourself an extra boost by improving your credit score. These are manageable ways to raise your score and save money when applying for a mortgage.

1. Always Pay Bills on Time

On-time payments have a huge impact on your credit score, and just one missed payment could drop your score as low as 180 points. Paying regularly and on time can be the difference between poor credit and fair credit.

2. Continually Check for Errors on Your Credit Report

It’s not uncommon for someone to see their score dip because of an error on their report. There are several sites where you can view your credit score, and individuals are entitled to one free credit report a year from the three major reporting bureaus.

3. Limit Your Spending

Lowering the amount of credit you are using can cause your score to jump up. Paying down high credit card balances is one way to start. The rule of thumb is to keep your balances at 30% or less of your available credit.

Take the Next Step Toward Your Own Home

If you plan on buying a house, avoid taking on any new debt to maintain a low debt-to-income ratio. Even if you have bad credit, this can help you obtain more favorable loan terms. For more information on homebuying with poor credit and your available loan options, contact us today.