It is no secret that credit score determines whether a lender will give you a loan anymore. After all, it is what notifies your lender the risk that they are taking by lending you the money. At the same time, it determines your interest rate and the amount of loan that you can get. So, that said and done, what should you and can you do in the event that your credit is bad?
Once you get to know that you have a bad credit score, you can’t help but ask yourself an array of questions. One of them is whether you can buy a house with bad credit. The word bad makes it sound like it is impossible. However, should you give up your thought of getting a mortgage simply because you have bad credit? For answers and much more keep reading. This article makes you know if you can buy a house with bad credit. It also defines what lenders term as bad credit and much more. Read on!
What Credit Score Do You Need To Buy A House?
There is no exact credit score that you need to have if you are planning to buy a house. It depends on the type of loan that you will borrow. If it is a conventional loan, the minimum credit score should be 620. In some cases, lenders will not agree to led someone with a credit score that is lower than 660.
If you want to buy a house using a jumbo loan, the credit score should be equal to or more than 700. That’s understandable because it offers an amount that is larger than that of a conventional one. It increases the risk involved hence the need for a high credit score.
When it comes to VA loans, it is no secret that its target is a special group. That would explain why it doesn’t have a minimum credit score requirement. Nevertheless, not many lenders will be willing to offer people with a score of less than 620 this kind of loan.
FHA loans have different credit score minimums for those buying a house. In fact, the deal depends on your down payment. If it is 10%, you can get a loan with a credit score of 500. On the other hand, if you make a down payment of 3.5%, your credit score should be 580 and above.
Last but not least are the USDA loans. In most cases, its minimum score is 580. In addition to that, there is a possibility of getting it even with a lower score.
Can You Buy A House With Bad Credit?
Having discussed the various minimum credit scores for different types of house loans, answering this question becomes easy. For instance, what one lender may be terming as bad credit for a certain kind may be good for another lender offering a different type.
However, it should be clear that it is always better to have a better one. Bad credit minimizes the types of mortgages that you qualify for. At the same time, it means getting a little amount and paying a high rate.
Find Out Your Credit Score
Do you want to know your credit score? If you are nodding, there is not much that you can do. There are agencies given the mandate to do so. Simply visit them, and they will offer you that information.
The major agencies are three, namely TransUnion, Experian, and Equifax. It is always advisable to get credit reports from all the three agencies for a great report. Some credit card companies and banks may also be in a position to help you.
How To Buy a House With Bad Credit
Now that you can buy a house with bad credit, how should you go about it? The process is quite simple. Follow the following steps, and they will help you make a wise decision.
Get Copies of Your Credit Report
Once you visit the agency, they will give you a credit report. Analyze how you have been spending your money, and, in this case, the one that you borrowed before. If you find some errors, raise them out because, despite being false, they have the power to destroy your credit score. Dispute the errors so that they can be rectified.
Consult a Housing Counselor
Knowledge is power, especially when making risky financial decisions such as borrowing to buy a home. Equally important, there is a reason why you have bad credit, and taking a new loan might not be a good choice. Since you will also pay high-interest loans, that’s also something to consider. That’s why you need a housing counselor. He will help you decide on what to do next.
Start Saving For a Down Payment
The fact that you have bad credit means that you need to convince a lender that you are worth the risk. One way of achieving that is making a large down payment. So, you better start saving.
Review Your Housing Budget
Once you have all the options, it is time to analyze if the offer you have is within your initial budget. That’s including the interest that you will have to pay by the end of the loan payment.
Necessary Steps For Buy A House With Bad Credit
If you happen to have bad credit, the best home loan options are the FHA, which stands for Federal Housing Administration loans. That’s because they need a low minimum credit score. You can have it with a credit score as low as 500. They also allow you to pay a down payment as low as 3.5 percent.
Work on Rebuilding Your Credit
However, it could be better to wait a little bit longer, improve your credit, and then look for a new loan after that.
Take The Necessary Steps to Grow Your Score :
If you decide to first improve your credit score, then you must keep one thing in mind. Sitting around and waiting for a miracle is not an option. There are a number of things that you should keep in mind. Here are some ideas of how to change your credit score
How To Improve A Bad Credit Score Fast
You can only improve bad credit if you understand what matters. Remember that it relies on payment history, credit utilization, age of credit history, the combination of loans, and the amount of new credit. Avoid late payments and stop the maximum usage of your credit cards. Those are major things that could see you improve your credit score. Here are other tips.
Increase Your Available Credit
This can only happen on two occasions. The first one is paying off existing balances. The other one is requesting an increase in your existing limit. The latter would mean that you will decrease your credit utilization. Consequently, your credit score will increase.
Add New Accounts (In Bulk)
You can also add new credit accounts. It will increase not only your available credit but also the credit combination that you can have. Do it once so that your hard inquiry period will be the same. Within no time, all the requests won’t matter.
Pay For Deletions
Unpaid loans always appear on your credit report as a collection. Pay all of them so that as much as they will appear on it, the status will be paid.
Stay Away From Hard Credit Inquiries
Do not apply for new loans. If you do, it is a clear indication that you are suffering financially, and you are desperate. No lender will consider such a borrower.
Best Home Loan Options For Buy A House With Bad Credit
There are several loan options if you want to buy a house. Here is a discussion of the various types.
This is a loan that is quite affordable to most borrowers. That’s because it is Freddie Mac and Fannie Mae purchases, guarantees, and secures it. It can either be conforming or non-conforming. If it is conforming, then it will fall between the maximum of these two government agents backing most of the mortgages. Otherwise, it is non-conforming.
FHA loans have the backing of the Federal Housing Administration. If you are buying your first home or haven’t bought one within the last three years, then you can qualify for this loan. It is an ideal choice if you can’t raise a lot of down payment. It is also one of the best if you have bad credit. You need a pair of mortgage insurance premiums. The first one is paid upfront, while the other one is a yearly payment until you pay the last penny of the loan.
This is the loan that you qualify for only if you are a military officer or veteran. The backing comes from the Department of Veterans Affairs. There are also other eligible beneficiaries, but it is the department that determines that. The spouses of the military members can also benefit from the same. If you are eligible, you can take a loan to buy a new home. On the other hand, you can also go for it to refinance an old mortgage.
This time of the loan is for one who earns low or moderate loans but needs to buy a home. Its backing comes from the U.S. Department of Agriculture. It is idmportant to note that you can only receive it if you are buying a home in rural areas.
How Can I Buy a House With Bad Credit And No Money Down?
There are ways of buying a house with bad credit and no down payment. As much as home value, creditworthiness, income, and debt will determine whether you get the loan, that’s not final. In some cases, all that you have to do is to convince the lender that the situation with your finances is getting better.
Sometimes, you don’t genuinely have bad credit. Identify the errors and dispute them. Pay the credit card and stop using them, especially if they are new if you can afford to do it. Loans such as Veteran Affairs Loans, U.S. Department of Agriculture Loans, and Federal Housing Administration Loans are also achievable despite the bad credit. If nothing seems to work, look for grants, especially from people who assist people buy homes. If you are lucky, your lender could also accept a gift in place of a down payment.
Pros and Cons of Buy a House With Bad Credit
There are the upside and the downside of buying a house when you have bad credit. This is the discussion of the two. They will help you know the benefits and consequences of doing so. Keep reading to know about both the good and the bad. Look for a credit counselor or lender to help you come up with a viable plan. Another idea is looking for a cosigner who has a good credit score.
It is a great chance of offering you a mortgage even when your credit score doesn’t look deserving. That can be a way of helping you improve your living standards as well as wealth. After all, you won’t have to keep paying rent every month. Eventually, you will own a home, and that is an asset.
In most cases, paying a mortgage loan may be cheaper than paying rent. So, you get to spend little money and eventually end up owning a home. On the other hand, you will only be paying rent, which is recurrent expenditure.
You might come across a homeownership program that helps you pay for your down payment or monthly payments.
The most obvious con is that one has to pay high-interest rates. As much as it may look small since it is calculated in percentages, if you do the math, you will realize that it is quite a lot of money at the end of the loan payment period.
You might also make a lot of trips and time before you eventually find someone willing to give you the loan. That is understandable since it is quite risky to lend you. Every lender is trying to be careful, and bad credit will not convince them that you are worth the risk.
You might have to pay a large down payment as well. That means releasing a lot of money upfront, and that may be impossible or leave you suffering later on.
Clearly, you shouldn’t give up your dream of buying a home simply because you have bad credit. It is possible to buy a home even when your credit score leaves a lot to be desired. All you have to do is to choose the best plan possible. Always weigh between waiting until your credit score improves and getting a mortgage at a high-interest rate and determine the one that backs better for you. Overlook neither the pros nor the cons of buying a house with bad credit so that you make a good decision. Regardless of the choice that you make, you will most likely make the right choice since you are informed.