Buying a House with Bad Credit: The How-To Guide

If you’re like many middle-class Americans, you dream of owning a home. Whether it be in the suburbs, the city, or the middle of nowhere, you’ll need a loan.

When you go to apply for a mortgage, you run into a big problem. Your credit score is less than ideal for getting a mortgage loan for your new home.

You shouldn’t give up hope here. You still have options when it comes to getting a mortgage with bad credit.

Do you want to find out how?

Continue reading below to learn about buying a house with bad credit. Soon you’ll be resting easy in your dream home.

Improve Your Credit Score

It may not be what you want to hear, but you need to hear it. If you want to take out a loan of any sort, you’ll want to make sure your credit is fairly good.

Better credit will bring you better interest rates and terms. There are a few ways you can improve your credit score in no time.

Check Your Credit Report

You may wish to view your own credit report. This will help you determine where your credit needs work.

This will reveal to you any errors made on your credit report. If you don’t recognize any items, you can dispute the errors with the credit bureau.

If you file a dispute, the creditor has 30 days to validate the account. If they don’t do so within 30 days, the account will be removed.

Pay Down Existing Account Balances

If you have any credit cards, check your balances. In general, you should keep your balances under 30% of the total credit limit.

For example, if you have a credit card with a $2,000 limit, you should keep the balance under $600.

Lower balances lead to higher credit scores.

Maximize Your Down Payment

If you don’t have good to excellent credit, lenders will be more wary of lending to you. One way you can mitigate this is offering a larger down payment.

This means the lender will be lending less money to you. As a result, you take on more risk than most borrowers. Lenders may view you as less willing to walk away from the mortgage if you invest more upfront.

For those borrowers with great credit, they can make down payments as little as 3% of the total value of the home. If you have bad credit, you may need to make a down payment for as much as 20% or more.

Know What You Can Afford

Before you start shopping around for homes, you need to know how much house you can afford. This goes not only to size but also location and amenities.

As a general rule, your monthly payments shouldn’t exceed about 28% of your total gross income. Combined with other bills, you should never exceed more than about 36% of your total gross income.

This means you shouldn’t shop for homes costing millions of dollars when you only make $50,000 a year.

Be realistic in your home search and aim to keep your loan amounts within reason. Keep in mind you’ll need to pay for home insurance, which is another challenge. This useful post can help you tackle the insurance challenge.

Go Mortgage Shopping

If you want approval for a mortgage, you’ll need to do a bit of research regardless of your credit score. Some lenders may be more flexible than others.

Additionally, not all lenders view the same credit scores the same way. While one lender may view a score of 650 as fair, another may view it as poor.

Try to speak with a loan officer before you submit an application. This may help you gauge whether or not you’ll get approval.

Once you start submitting applications, try to do so as quickly as possible. All applications within a 45-day period will count as one hard inquiry on your credit report. This will keep your credit score protected from too much damage.

Consider FHA Loans

The Federal Housing Administration (FHA) offers loans with looser credit requirements. You can get an FHA loan through a variety of different banks and lending institutions.

If your credit score is below 600, this may be the best option for you. If you have a score of around 580, you may get a loan with only 3.5% due at closing.

Even with a score of 500, you can secure a loan with only 10% down.

Keep in mind you’ll need to pay a mortgage insurance premium. This will depend on the size of the loan and the down payment.

An FHA loan may not be for everyone. However, if you find yourself with poor or limited credit, you may not qualify for a traditional mortgage loan. In such cases, an FHA loan may work.

Seek Pre-Approval

Have you ever gotten one of those letters in the mail with the words “You’re Pre-Approved” across the front? These letters usually pertain to credit cards, but you can get pre-approved for mortgages.

Once you find a lender who will work with you, you can ask for a pre-approval letter. The lender will gather important information such as your credit report and income.

They’ll use this information to determine how much you can borrow and under what terms.

This will help you as you move forward. You’ll get an idea of how much house you can buy, where, and with what amenities.

Get a Good Agent

Once you have an idea of budget, you’ll need a professional on your side to help you get in your new home. A real estate agent can find homes within your budget and with everything you need.

Buying a House With Bad Credit: It’s Possible!

Even if you have bad credit, you can still get into a new house and settle down. Making that transition from renter to owner is always tough, even if you have good credit.

With bad credit, you’ll face different challenges. Use the above information about buying a house with bad credit and put it in your pocket.

Go here to learn more about buying, selling, renting, and more.

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