Bad credit can happen to good people. While having a credit history that is less than stellar can make it more difficult to achieve your dream of owning a home, it doesn’t render that dream impossible. Understanding how to buy a house with bad credit can help you overcome this hurdle and join the ranks of homeowners.
When Is Credit Bad?
As MyFico explains, your FICO credit score is the result of a complex calculation that relies on the information found in your credit report. Your payment history, the amounts that you currently owe, the length of your credit history, the amount of your new credit, and the mix of credit types that you utilize all factor into this calculation. The result is a number between 300 and 850.
When is credit bad? According to Credit.com, that’s a determination that lenders, insurance agents, and other interested parties make when they are evaluating the amount of risk that doing business with you poses. While the definitions may shift slightly from one entity to another, credit scores are generally broken down into the following levels:
- Bad Credit: 300 to 600
- Poor Credit: 600 to 649
- Fair Credit: 650 to 699
- Good Credit: 700 to 749
- Excellent Credit: 750 to 850
How to Buy a House with Bad Credit
Would-be buyers with excellent credit will likely have an easy time finding mortgage lenders willing to work with them, but the options for those with lower credit scores tend to be more limited. What should you do if you want to buy a house but you have bad credit?
Check Your Credit Reports
When it comes to your credit, ignorance is not bliss, so SmartAsset suggests that you start your quest for a mortgage by checking your credit reports. You can request a free copy of your credit report from each of the major credit reporting agencies. While it may not provide the most delightful reading experience, reviewing these reports will give you a clear sense of exactly where you stand and what lenders will see when they examine your credit history. It also gives you a chance to correct any errors or inaccuracies that might be dragging your score down. If you find something that’s incorrect, dispute it with the credit reporting agencies. After investigating the matter, they will remove or update inaccurate information, which can have a positive effect on your credit score.
Talk with a Lender
Mortgages are not one-size-fits-all loan products. Different loan programs have different requirements, and some of them are actually geared toward borrowers whose credit isn’t perfectly polished. That makes talking with a reputable lender about your options an important step for anyone wondering how to buy a house with bad credit.
As U.S News & World Report notes, conventional mortgages generally require a credit score of 620 or more, but other loan programs are more forgiving. While lenders can set their own minimums, the guidelines for the FHA loan program allow borrowers to have credit scores as low as 500, and the VA loan program has no credit score requirement. Discussing your situation with a knowledgeable lender can help you discover if either of these programs would be a good fit for your needs and learn about other possibilities. Even if you learn that you don’t qualify for the loan that you want at the moment, meeting with a lender gives you a chance to discover where you stand and what you’ll need to accomplish to achieve your goals.
Be Realistic About What You Can Afford
Lenders want to match borrowers with mortgages that they can afford, so being realistic about the size of your loan is important for anyone trying to buy a home. If you have bad credit, pushing your financial limits can sink a loan approval, so it’s important to have reasonable expectations. How much is reasonable? As the Motley Fool explains, experts typically advise that the total monthly cost of your mortgage payment, insurance, and property taxes should be no more than 28 percent of your pre-tax income. Likewise, your combined monthly payments for all your outstanding debts should be no more than 36 percent of your pre-tax income.
Save Up for a Down Payment
What else can you do to convince lenders that you’re a good risk despite your bad credit? Debt.org suggests that having a large down payment can help. Putting down more money reduces a lender’s risk and reassures them that you’re serious about your home purchase.
Learning how to buy a house with bad credit may seem intimidating, but there are actually a wide variety of options available to people with less-than-perfect credit. And at PrimeLending Twin Cities, we thrive on helping people reach their housing goals. We work hard to make the home loan process as easy and comfortable as possible for the people we serve, and we have loan products suitable for a wide range of buyers. Working with you to find your ideal home loan would be our pleasure. Contact us today to arrange a consultation.