How to buy a home with bad credit
Having bad credit and a desire to purchase a home is a tough combination. While it’s not always easy or pretty, it is possible. Here are my 5 tips for those with bad credit and an interest in home-buying.
Hey there, I see you! Don’t worry if you have poor credit right now - nothing is permanent and you can fix this simply by making some changes to your habits. From personal experience, I learned that it’s more about getting yourself educated around credit and putting some plans in place to watch yourself succeed - because you can.
But, also - there are options for people with lower credit when it comes to financing a home, and definitely some details you will want to understand. Firstly, anything less than 670 on your credit report will be considered not-so-good or in technical terms, “subprime.” I’m not a lender nor have I ever been, but I know that often times, lenders look at more than just your credit score - they look at your overall amount of debt, the size of your down payment, your income, and then some.
So, unless you are planning to pay cash for that home you’re eyeing, check out my list of 5 tips for buying a home with low or bad credit.
Find out your credit score and look at your credit report. This is the easy part. Many people seem to think that it’s hard or bad to find out your credit score, but that is not the case. When I first found out I could look at my credit score daily, I discovered that I not only had a score in the low 600s (much to my wife’s dismay), but I also learned all about the app Credit Karma. It is free and I am really grateful for it. I strongly suggest you download it and keep track of your score and credit report regularly - you wouldn’t want any incorrect charges or collections on your credit report during your lender application process (or ever!) and a simple review in advance can help assure you that you’re in the best position possible to get the ball rolling. There is lots to discover about your credit within this app. Enjoy!
Plan to pay more. I reiterate here that I am not a lender nor have I ever been, but in my personal and professional experiences, people with better credit scores get lower interest rates on their loans - and vice versa.
Learn more about FHA loans. Simply put, FHA Loans (loans insured by the Federal Housing Administration instead of a private lender like, say, Wells Fargo or Key Bank) come with a lower credit score requirement and you can qualify with a down payment of just 3.5% of your home’s price. There are catches here, of course. Oftentimes when a down payment is less than 20% of the home’s price, you will pay Private Mortgage Insurance (PMI). While traditional mortgage loans allow you to cancel your PMI once your home equity builds up, you cannot eliminate PMI on an FHA loan. On a personal note - we purchased a short sale and the transaction required an FHA loan. So, we were locked into our PMI payments until we eventually made some key updates to the home, increase our home equity, and officially refinanced into a conventional mortgage. This move required strong credit, however, but dependent on your score, your commitment to building your credit, and the time you’re willing to pay PMI - this could be an option for getting you into a home.
Plan for a large down payment. I can’t guarantee anything here, but think of it from the perspective of a lender taking a chance on you. If your credit is poor but you have a significant cash down payment, I’d say you’re in a better position for them to accept your application then with a 3.5% or otherwise low down payment.
Improve your credit score as fast as possible. Awareness is half the battle in my opinion. Get that Credit Karma app (or something similar) and start reading through their resources. Make sure you don’t have any collections on your report (these are the worst for your credit!), pay down your credit card balances and keep them low or pay them off every month, and make sure you pay all your other bills on time. You can do this - I know it, because I did!
Are you a first-time home buyer? Check out my super quick tips just for you >>