How to Buy a Home With Bad Credit
Many Americans dream of becoming homeowners one day, but often their aspirations are squashed when they realize their credit score is standing in the way. A credit score is a critical component of a person’s overall financial health. If your credit score is bad, you may find it tough to buy a home the conventional way.
When is the best time to buy a house? Find out by clicking here.
That said, your dreams of buying and owning a home aren’t necessarily doomed just because you have bad credit. Sure, it will be a lot more difficult to get approved for a conventional mortgage if your credit score is sub-par, but there are still ways to do it.
Here are the steps to buying a house with bad credit.
Before you start pounding the pavement in search of a new home to buy, you’ll want to get bad credit mortgage pre-approval first, this typically requires a visit with your mortgage broker. Getting a pre-approval for a home loan with bad credit should ideally be done before you start looking for a home because it will tell you roughly how much you’ll be able to comfortably afford in a home purchase.
With this number in mind, you’ll be more focused on homes that fall within your particular price range. Not only will this help you avoid wasting any time, it will also help you avoid any disappointments.
Already approved? Read this to learn how you can pay off your mortgage early.
Find Yourself a Lender
If you have bad credit, you may find that conventional lenders may not be willing to extend a home loan to you. If that’s the case, you may want to look for the best mortgage lenders for bad credit. While banks and other conventional lenders may prefer to work with borrowers who have a healthy credit score, there are plenty of alternative and private bad credit mortgage brokers out there who work specifically with those who have a poor credit history.
It should be noted, however, that bad credit mortgages typically come with much higher interest rates compared to traditional mortgages. That’s why you’d be well advised to take steps to improve your credit score in order to eventually be capable of securing a conventional mortgage at a much lower rate. This, in turn, will make your mortgage a lot more affordable.
Get a Solid Job
You have one big ding against you: bad credit. Because of that, you need to make up for it in other ways, and having a steady job that pays well is one of them. Ideally, you’ll be employed by a company that has you on full-time permanent staff and pays you well.
Are you a stay-at-home parent? Look here to learn how you can get by as a one income household.
However, if you work on commission or contract, this might not be considered stable enough for conventional lenders to approve you for a mortgage. Worse yet, buying a house with bad credit and a low income will almost certainly result in a rejected mortgage application, even if you apply with an alternative lender. A solid income is absolutely essential to getting a mortgage, even if your credit rating is poor.
To buy a house with bad credit and no money is almost an impossible feat. As such, it would be best to find a stable job with steady income, particularly if you hope to deal with a prime lender one day.
Save Up a Big Down Payment
Just like a stable income, a large down payment can somewhat make up for your bad credit score. If you can come up with a sizable amount of money to put toward a home purchase and a mortgage, you’ll be less of a risk to lenders. That’s because you’re reducing the amount that you actually have to borrow and are also showing the lender that you have the financial means to get approved for a home loan and afford your monthly mortgage payments.
Read this to discover some ways of saving up for a down payment.
Get a Cosigner
If your credit rating is poor and you are struggling to secure a mortgage, you may want to consider getting a cosigner for a mortgage with bad credit. By putting their name on a mortgage, a co-signer is essentially guaranteeing that the debt will be repaid if the primary borrower defaults on the loan. If you fail to make payments, the co-signer will be legally obligated to step in to make the mortgage payments on your behalf.
What happens when you can’t afford to make your loan payments on time? Find out here.
This is definitely a potentially sticky situation if you are not trustworthy with money. The only time you should consider asking someone to cosign on a mortgage is if you are financially responsible and are capable of making your payments on time every month. If not, your cosigner will be on the hook.
Improve Your Credit Score
There’s no reason for you to just accept the fact that your credit score is low and not do anything about it. Instead, you should be taking steps to try and improve your score long before you decide to buy a home. Get a copy of your credit report to see exactly where you stand with your credit score so you know exactly what you are dealing with.
From there, take measures to improve it by doing the following:
- Pay your bills on time and in full every month
- Have errors on your credit report investigated and rectified
- Don’t take out any loans or add any further debt to your current load
- Leave old debt on the books and don’t close out any old accounts
- Take out a secured credit card and use it responsibly to show lenders you’re capable of paying your debt
While it might take some time before you see any increases in your credit score, taking these steps can help you eventually bring your score back up to par and make it easier for you to get approved for a mortgage.
Having trouble understanding your FICO credit score? Check this out.
Buying a house with bad credit will certainly be a tough road to travel. Obviously, the better your credit score, the higher the odds of getting approved for a mortgage. But it’s still possible to secure a home loan with bad credit, as long as you take the necessary steps and deal with the right people. That said, it’s always in your best interest to take steps to improve your credit score so that you can increase your odds of mortgage approval without having to deal with private lenders, who will likely charge you higher interest rates.