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How to Buy a House with Bad Credit

If you are looking for how to buy a house with bad credit, it is not as difficult as you might think.

However, it is important to know what your options are and to follow a few simple steps so that you can have the home of your dreams.

Buying a house will require good credit. But as many people have found out, a poor credit score can turn what should be the happiest time in a person’s life into an unnecessarily stressful and frustrating experience.

Thankfully, it doesn’t have to be that way if you know what to look out for in the process of home buying with bad credit.

First things first, can you buy a house with bad credit?

Yes, you can buy a house with bad credit. But it’s not easy. With no credit history and little or no income, your chances of qualifying for a mortgage and getting a home loan are slim to none.

Trying to get around these obstacles can lead to even more problems, as people who lack credit are often prime targets for predatory lenders who offer loans with sky-high interest rates.

As long as you have a steady income and can put together a down payment, you can get a loan for a house with bad credit.

Before you do that, though, make sure you check your credit report.

Many people find it shocking that their credit isn’t as good as they thought when they pull the report.

Credit reports are used to help determine how risky you are as a borrower, so if there are errors on your record, it will hurt your chances of being approved for your loan.

Having poor credit won’t automatically disqualify you from getting a loan, but if there are errors on your report and if they can’t be verified by the lender, you may have trouble getting approved.

If you find something on your report that is inaccurate, contact the company listed on the report and work with them to correct it.

Once it’s verified by the lender (and make sure you press them for verification), then you’re free to move forward with applying for the loan and getting pre-approved.

What Is a Bad Credit Score to Buy a House?

A bad credit score? It’s one that paints a negative picture of your financial situation.

It’s important to know what your credit score is when going into the home buying process because that score will be used by lenders to determine whether or not you are eligible for a loan.

A FICO credit score ranges from 300 to 850, and a higher score means you’re more likely to pay off any debts you take on.

A bad credit score to buy a house depends on the lender or mortgage broker evaluating your application. You should know what is a good credit score to buy a house before you start shopping around.

A credit score of 620 is considered to be a very bad credit score, and if you are in this category you will find it difficult to get approved for any type of loan product.

A score of 640 is also considered to be bad credit, but more companies will give you a chance at getting a loan. A 720 or above is considered to be good credit.

An FHA loan requires a minimum 620 credit score and most conventional loans require at least 640 but can go as low as 580 depending on the lender.

If you have less than a 580 credit score, it may be very difficult to obtain a mortgage loan and you may need private financing or mortgage insurance.

Slightly more than half of all mortgages in the United States are issued through Fannie Mae or Freddie Mac.

These two agencies use the FICO credit score to determine your ability to repay a mortgage loan.

Both Fannie Mae and Freddie Mac require at least a 640 score to qualify for their purchase money mortgages, which are typically used to buy a new home.

If your credit score is below 640, you will likely be denied a mortgage loan.

Although this is not guaranteed, it is very likely that you will be denied by these two agencies if your credit score is too low.

Fortunately, there are other options available when buying a house.

If your credit score is low enough to be denied for an FMI loan through Fannie Mae or Freddie Mac, consider alternate financing options such as an FHA loan or USDA Rural Development loan.

These loans require lower credit scores and may still allow you to get a mortgage loan despite having bad credit scores.

Related: How Much Can I Borrow for My Mortgage Based on My Income?

What Is a Good Credit Score to Buy a House?

There’s no magic number that guarantees approval, but the higher your score, the better the odds.

FICO Scores range from 300 to 850, and Vantage Scores go from 501-990. Both are on a scale of 300-850 or 501-990.

A 700 is considered good for most mortgages, but it’s not an exact science.

If you have a credit score of 740 or higher and have been making on-time mortgage payments for at least two years, you should have no problem getting a loan.

A score below that could delay your closing date or get you rejected altogether.

Lenders typically use FICO scores to evaluate mortgage applications. FICO scores are issued by credit reporting agency Fair Isaac Corporation (FICO), based in California.

The three main credit bureaus, Equifax, Experian, and TransUnion, report information to FICO so it can calculate scores for them.

Your FICO scores can vary slightly depending on which bureau is used to calculate the score for your mortgage application.

What Causes Bad Credit?

Bad credit can be caused by several factors, but most bad credit ratings are the result of having too many accounts in default, bankruptcy, too many collection accounts, or a history of paying late.

Many issues that lead to bad credit are avoidable and consumers should do their best to learn how to stop bad credit before it affects them. Here are some reasons why consumers can have bad credit scores:

  • Delinquent Accounts – Delinquent accounts can be a major factor in lowering a consumer’s score. This can be caused by late payment or even just being over the allowed balance.
  • Too Many Credit Accounts – Having too many open credit accounts at one time can lower a consumer’s score. The more open credit lines you have, the greater your risk is to creditors.
  • Too Many New Credit Accounts – Applying for too many new credit accounts within a short period of time can lower your score. This is because it is viewed as risky to creditors and they question whether you will be able to handle your finances well in the future.
  • Collection Accounts – Having collection accounts on your report will dramatically lower your score. These are debt that you owe that has been turned over to an outside agency for collection. They will remain on your report for seven years from the date they were first reported.

How to Get Your Credit Report

To get your own credit report, contact the three major credit bureaus. They are Equifax, TransUnion, and Experian.

You can call them or go online to their website to request a report. Be sure you also request your free annual credit report which you are entitled to once every 12 months from each of these agencies.

If you have any errors on your report, they will work diligently with you to resolve the matter. If they do not, they are required by law to remove any inaccurate information from your file within 30 days.

Now that you’re well acquainted with the credit scores required to buy a house, let’s discuss how to buy a home with bad credit.

How to Buy a House with Bad Credit

Follow these steps on how to buy a house with bad credit and you’ll find out that it’s not as difficult as you might think.

  • Get your credit report

The first thing to do is get your credit report. This is what lenders use to assess your application.

The three major credit reporting agencies are Equifax, Experian, and TransUnion. The best way to get access to all three is to visit the Annual Credit Report website.

Once you have your reports, study them carefully for errors and work with a lender to fix any issues that exist. If something inaccurate is on your report, a lender could use that as a reason not to lend you money.

If there are errors on your reports, they will need to be removed before you can receive any loans or credit cards.

Next, check your score. You want to know where you stand now, so you can compare it to where you’re going.

Take note of what makes up your score — things like whether or not you pay your bills on time or how much debt you have compared to how much money you make every month — so you know what areas need improvement as soon as possible and how hard it will be to improve them.

  • Make a huge down payment

It’s possible to buy a house with bad credit. But you will have to make a big down payment, and you may have to pay higher interest rates.

FHA loans are available even to people who made some mistakes in the past.

You can get an FHA loan with nothing down, but realistically, it’s best to have at least 3.5 percent of your home’s value as a down payment.

If you put less than 20 percent down on the home, you will likely have to pay mortgage insurance until you reach that 20 percent threshold.

Mortgage insurance protects the lender in case you default on your loan by adding an additional monthly fee tacked on to your mortgage payment.

This can make it more expensive for you to get a loan with little or no money down.

You’ll need good enough credit to get approved for an FHA loan, but not necessarily great credit scores.

You can be denied an FHA loan if your credit history shows recent delinquencies — like missed payments or charge-offs — in addition to other problems like bankruptcies and foreclosures.

  • Use a co-signer

A co-signer is someone who agrees to pay off the loan if you are not able to do so.

If you have bad credit, you may be leery of purchasing a home because your mortgage will be affected.

However, by using a co-signer, you can still buy a house and get the credit to build upon your own as well.

Because this person will be putting their name on the line with yours, they need to be someone that you trust completely.

This person will be on your mortgage documents along with you and if anything happens to you, they will have to deal with the financial responsibility.

  • Try to pay off all debt

You need to make sure your debt-to-income ratio is under control.

If all of your debt payments combined are more than 40% of your monthly income, that’s too high and lenders will be reluctant to lend you money — regardless of what type of credit score you have.

Before trying to get a house with bad credit, ensure you pay off past due payments.

If there are any accounts that have gone past due, like medical bills or old utility bills, make sure those are paid up before you apply for new credit.

You’ll qualify for better deals when you’re not carrying high balances on old debts.

  • Check if you qualify for a USDA or VA loan

If you’re a first-time buyer and have bad credit, it can be hard to find an affordable loan.

However, there are two government-backed loan programs available for borrowers with less than perfect credit – USDA loans and VA loans.

Both programs offer great rates and terms, with no down payment required.

You might qualify for a USDA or VA loan, which is subsidized by the federal government and require little or no down payment.

You also might qualify for a “no money down” mortgage program offered by some lenders.

In these programs, the lender makes up the difference in your monthly payments if your income does not cover the full cost of owning a home.

The USDA loans can be used for single-family homes, multi-family homes, and home improvements.

In order to qualify for this program, you must be buying your home in a designated rural area, which is an area that is not within the boundaries of a city with a population of 20,000 or more people.

There are also other things you must do to qualify for this loan because it’s backed by the government.

You must have been turned down by at least three banks or mortgage companies before you can apply for this loan.

This is to make sure that you won’t become eligible for this loan unless you’ve tried getting a conventional loan and been denied three times.

You must agree to live in the home as your principal residence for at least five years after you purchase the property.

If you sell the property within that time period, you must repay all government-guaranteed funds plus a fine of 1% of the value of the property every year until it is paid off.

With a VA loan, you don’t have to worry about having good credit. The VA guarantees you a mortgage, regardless of your credit history.

You can put down as low as 3.5 percent, and there are no mortgage insurance premiums.

  • Apply for an FHA loan

FHA loans are one of the most popular mortgage products and for good reason!

An FHA-backed home loan is ideal for those with low credit scores or a high debt-to-income ratio, first-time homebuyers (aka millennials), and anyone who has little to no down payment saved up for the purchase.

FHA loans are a great option for people with a low credit score.

They’re also a good choice if you have little or no money for a down payment and you have other issues that have kept you from qualifying for a conventional loan.

The FHA does offer assistance for those with credit problems.

In fact, it’s one of the few places that will lend to people with credit scores in the low 500s. There are two main loan programs the FHA offers:

FHA-insured loans. Borrowers put down a minimum of 3 percent and can obtain a loan of up to $314,827.

In addition, they’ll pay a 1.75 percent upfront mortgage insurance premium when they close on the loan.

The premiums are typically rolled into the loan and paid off over time — usually 20 years, though borrowers can also pay them off more quickly if they choose.

The FHA charges higher-than-average mortgage rates because it guarantees repayment of the loan if borrowers default.

FHA 504 loans. Borrowers put down a minimum of 10 percent and can borrow up to $726,525.

There’s no mortgage insurance required for this type of loan, which has an interest rate that is typically comparable to those available from conventional lenders without mortgage insurance protection or guarantees from the federal government.

  • Avoid making big changes to your bank account

One of the best ways to improve your credit score is to avoid making big changes to your finances.

This can be hard to do when you’re trying to buy a home, but it’s worth the effort.

Don’t move accounts around too much.

Your credit report lists all of your outstanding debts, listed in order by account number.

When you open new accounts, those show up on your credit report as new accounts, with no indication of which one was opened first.

If you close old accounts, that’s noted too — and also shows up as a negative entry on your credit report.

By moving old accounts around or adding and subtracting debt from various sources, can hurt your credit score, because it suggests poor management and reduces the average length of time that accounts have been active in your history.

By contrast, if you don’t make any changes and keep balances low on all of your open accounts — including credit cards — this can help boost your score. In short, don’t close or open new accounts unless absolutely necessary.

Also, be smart about applying for loans.

Another way people can end up hurting their credit scores is by applying for loans they don’t need — or worse yet, applying for multiple loans at the same time.

Also Read: How to Apply for a Home Loan

  • Use a non-bank lender

The best way on how to buy a house with bad credit is to get a non-bank lender, such as a mortgage broker or an online lender.

They will be more flexible about your credit score and financial background and may allow you to get a mortgage even if you fall short of the bank’s requirements.

One major advantage of non-bank lenders over banks is that banks are government-regulated entities, which means they must adhere to certain rules when they lend money and issue mortgages.

Most non-bank lenders aren’t subject to these rules.

For example, banks must verify your income with pay stubs or tax returns, but non-bank lenders don’t have to do that.

They can accept income information directly from you (or your employer), which makes it easier for them to approve loans for people with bad credit.

Non-bank lenders do not need to comply with federal regulations regarding your ability to get a mortgage, so they can be more lenient than big banks.

  • Avoid ads promising guaranteed approval loans

There is no such thing as a guaranteed approval loan.

There are plenty of companies out there that will advertise “no credit, no problem!” and promise to get you a loan if you can’t qualify elsewhere.

This sounds great, but it’s not true.

Fannie Mae and Freddie Mac, the government-backed mortgage giants, require lenders to verify the income of all borrowers and run a credit check on everyone who takes out an “A” loan — one that is sold to Fannie or Freddie.

They also have their own standards for approving loans, which vary from state to state but include things like debt-to-income ratios and how much money is in your bank account.

  • Check out a few mortgage lenders

Shop around for a mortgage lender who will work with borrowers with less than prime credit scores.

You may find that some lenders charge higher fees or require larger down payments, but they may be worth it if they are willing to give you the loan you need at an affordable interest rate.

  • Try to improve on your credit score

Improving your credit score does not have to be a difficult task. By using these tips, you can begin to improve your credit score within just a few weeks.

I’ll give you three quick ways to improve your credit score.

First, pay all of your bills on time.

This is the easiest way to improve your credit score. If you are having trouble paying off one debt, pay it off as much as you can

Second, pay down your debt.

As you pay down your debt, your credit score increases because you are decreasing the amount of debt that you have.

This can be done by making extra payments on the debts that you owe or by paying off the smallest debts first.

Lastly, keep all of your accounts open and active, but do not use them too often.

When credit card companies see that you are using a card regularly, it lowers their risk of lending money to that person in the future.

Having an account open also keeps your history long, which also helps to raise your credit score.

However, always be sure to keep an eye on how much money is being charged to each card and make sure that they are only charging you what they said they would charge you when they gave you the card in the first place.

Final Thoughts on How to Buy a House with Bad Credit

Ultimately, with the right amount of determination and resources, you can buy a home with bad credit.

If your situation is dire, talk to a professional who can help you explore all of your options.

With smart planning and a little luck, it’s possible for almost anyone to buy a home regardless of their credit score.

Now that you know how to buy a house with bad credit, what are you waiting for?

Go get that house today.

Also Read: How to Get a Mortgage on a Low Income

Bryan Grey
Bryan shares insightful mortgage tips to help homeowners make the best decisions regarding mortgages and loans.


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