Buying a house is a difficult and complex process under the best circumstances. At first glance, it can seem nearly impossible if you have a bad credit score. While less than ideal credit can add some challenges to the home buying process, it certainly does not make it impossible to get approved for a mortgage and become a home owner. So how to buy a house with bad credit? Here, we will go over some options that can help you qualify to buy a house despite your credit woes.
Do What You Can to Improve Your Credit
You may not be able to move your credit score from poor to stellar, but there are things you can do to make it a little better to the eye of a potential mortgage lender – and when it comes to qualifying for a loan, every little bit helps. Steps you can take to help tidy up your credit report include:
Deal with issues in your credit report – You can get a free copy of your credit report once a year from each of the three major credit reporting companies through AnnualCreditReport.com. Request these reports and go over them carefully to check for errors or inaccuracies. If you find inaccurate information, file a dispute to have it corrected. If you have collections, missed payments or other black marks on your report, negotiating with the creditors involved may help. They may be willing to delete the negative information if you pay off what you owe. Not all creditors will do this, but it doesn’t hurt to ask.
Build a 12-month history of on-time payments – Once you have cleaned up your credit as much as you can, being vigilant about paying all your bills on time for at least 12 consecutive months can help you reestablish yourself as a good credit risk.
Pay off or pay down debt – Your debt-to-income ratio affects your credit score and is a factor that lenders look at to determine whether you are credit worthy. This ratio is the amount of debt you owe as compared to your income. Paying down credit card debt is a good place to start to improve your ratio, and getting a handle on other debt, such as car loans or student loan debt can help as well. Ideally, you want to lower your total debt to less than 40 percent of your income, with that new mortgage payment you hope to have factored into that total.
Build some savings/cash reserves – Having some backup cash on hand in case of unforeseen circumstances, such as a medical problem or job loss, for instance, can improve your odds of getting approved for a loan. Lenders like borrowers who have a nest egg that can cover mortgage payments and other bills for at least 6 months. This shows that you are responsible and serious about meeting your obligations, even in rough times.
Save For A Large Down Payment
Having the means to offer a larger than average down payment on a home purchase can work to sway lenders in your favor when you have bad credit. A larger investment of your own money generally means that you will be less likely to default on your mortgage, lowering your perceived risk in the eyes of lenders. It also works to provide lenders with the impression that you can handle your finances – and therefore a mortgage payment – despite that less than stellar credit history. You counteract that poor credit history, you will want to set aside enough money to put a down payment of at least 20 percent of your home’s purchase price.
Find Lenders Willing to Work with Low Credit Scores
There are home mortgage loans available for people with bad credit. These are generally government-insured loans, such as FHA loans, USDA loans and VA loans. These loans are easier to qualify for with a poor credit score than are conventional mortgage loans. However, qualification standards vary according to the lender you go through to get these loans, so you will need to shop around for lenders who are willing to work with potential borrowers who have low credit scores.
Look into Private Mortgage Options
Last, but not least, on our list of options for how to buy a house with bad credit are private mortgage loans. This can mean finding a friend or family member to put up the purchase price of your home, allowing you to make monthly payments to them until the loan is repaid. It can also mean finding a home seller who is willing to hold a private mortgage for you, allowing you to pay off the purchase price over a set number of years. Any such arrangement should be undertaken with caution, with contracts drawn up by a good lawyer to protect the interests of both borrower and lender.