Buying a home, in almost every case, is better than renting one. But what if you have a bad credit score?
Is it even possible to buy a house with bad credit?
You’d be surprised to hear that the answer is yes. However, there’s more to it.
In this article, we’re going to go over the following steps, which can lead you to owning a home despite having a bad credit score:
- Get your credit score.
- Look for errors in your report.
- Meet with a lender.
- Apply for an FHA loan.
- Be ready to accept a higher interest rate.
- Work with a qualified real estate agent.
- Make a bigger down payment.
- Use your mortgage to rebuild credit.
Let’s dive right in.
1. Get Your Credit Score
Before you can think about buying a house, you’re going to need to keep tabs on your credit.
You probably already were, and that’s most likely why you’re reading this article right now. But, if you haven’t already, go ahead and look at your FICO credit score.
There are lots of ways to see this for free. Don’t pay for it.
In conjunction with FICO, you would also be wise to look at the three agencies that report credit scores: Equifax, Experian, and TransUnion.
2. Look for Errors in Your Report
Once you have your credit report on hand, you’ll want to search for errors in reporting.
Think of a credit report as a history book of all your payments and dealings with loans and credit cards. Use resources like AnnualCreditReport.com to see your 12-month history of credit and make sure nothing is inaccurate.
If you have a bad credit score and you don’t know why, it’s essential that you check for errors, as that’s likely the issue.
3. Meet With a Lender
Even with a bad credit score, you still have a chance of qualifying for a mortgage.
Meeting with a lender means you can have your finances evaluated and preapproved for a mortgage. You’ll also be able to get a better insight into what your monthly payments might be.
Who you choose as a lender doesn’t matter all too much, but you might want to seek a lender in person rather than online mortgage companies.
Since you’re on the tight rope of having a poor credit score, anything can happen in the lending process that could make or break you. Having a personal connection with your lender might make communication easier if things go astray.
4. Apply for an FHA Loan
FHA loans are traditional loans but insured by the Federal Housing Administration. As long as your credit score is at least 580, then you may be able to qualify for an FHA loan with a 3.5% down payment on the purchase price of the home.
An FHA loan will require you to pay for mortgage insurance throughout the duration of your loan. It’s almost like lender’s title insurance, but instead, it’s meant to protect the lender from a lost loan if you default.
The key points you need to understand about FHA loans:
- They are traditional loans but insured by the Federal Housing Administration.
- You’re not guaranteed for approval.
- A 580-credit score isn’t necessarily required, but it’s the benchmark for a decent chance of approval.
- You cannot cancel your private mortgage insurance until the loan is completely paid off.
5. Be Ready to Accept a Higher Interest Rate
It’s ironic, but the penalty you receive for not having a good credit score is higher payments.
While it seems unfair (it is), it’s the way the world works. Creditors do this in order to protect themselves.
In essence, charging higher interest allows them to take as much as they can from you in the event you default at some point.
Use the mortgage calculator below to see how interest can affect your payments.
6. Work With a Qualified Real Estate Agent
Obviously, I’m biased, but I’ve said before that lining up your real estate agent before you start shopping for a home is important so that the transaction is seamless and you don’t lose bidding wars.
If you have poor credit, this is especially important.
A good agent can teach you about the process, how having an FHA loan will factor into your transaction, and what type of budget you should aim for.
A simple Google search for the top agents in your marketplace should do the trick.
7. Make a Bigger Down Payment
Coming up with more money to put down is going to do a lot of things for you, such as:
- Reduce your monthly payment.
- Increase your odds of approval.
- Potentially lower your interest.
If you can do it, making a bigger down payment can change the game for you. Sure, the FHA loan only calls for a 3.5% down payment, but I’ll always recommend more if you can.
Also, remember that closing on a house will require many closing costs and your initial offer will include an earnest money deposit. Be sure to read up on those factors.
8. Use Your Mortgage To Rebuild Credit
A mortgage gives you a fantastic opportunity to start rebuilding your credit.
As long as you make your monthly payments and not overextend yourself on other forms of credit, within a few years or more, you should be back on your feet.
Even better, you’ve built up equity over this time. Now you have good credit, wealth, and a home, with room to expand.
That’s something to be proud of.
Final Thoughts
If you truly want to buy a home and not pay rent anymore, but you’re apprehensive because of a poor credit score. I would encourage you to at least weigh your options.
Coming to this article is a great step in the right direction.
Don’t let bad credit control your life. There are tons of information out there that can help you navigate the stresses of financial difficulties. I’ve been there too.
Just stay strong and go after what you truly want in the world. Give things time to build. You’d be surprised by the results.
Stay Classy.
