Part of the home-buying process is securing a mortgage. For some borrowers, this can be the most difficult part. If you have bad credit, your options for securing a loan may be limited.
That doesn’t mean you can’t buy a house. You may just need to approach the process differently. This article will explore what it takes to buy a house with bad credit, your options, and how you can improve your credit score.
What is a bad credit score?
A credit score is a numerical representation of your creditworthiness. Lenders use it to determine whether you’re a good candidate for a loan and what interest rate you can qualify for. Credit scores indicate to lenders how likely you are to repay a loan on time.
Most credit scores range from 300 to 850. The higher your score, the better your credit health, and the more likely you will be approved for a loan with favorable terms. A “good” credit score is generally considered 700 or above.
A “bad” credit score is usually below 630. If your score falls in this range, you may have difficulty qualifying for a traditional mortgage. You may also be charged higher interest rates and fees.
What are the typical requirements for a mortgage?
To secure a traditional mortgage, you’ll typically need the following:
- A credit score of 700 or higher
- A down payment of 20% or more
- A debt-to-income ratio (DTI) of 43% or lower
Naturally, these requirements can make it difficult for someone with bad credit to qualify. A lower credit score can impact your DTI ratio, as can a little history of borrowing.
This can make it hard to get approved, even if you have the cash for a large down payment.
What are your options if you have bad credit?
Let’s run down some options for homebuyers with bad credit.
1. Look for a co-signer
If you can’t qualify for a mortgage on your own, you may be able to get approved with the help of a co-signer.
A co-signer is someone who agrees to share responsibility for repaying the loan with you. This can be a family member, friend, or business partner.
Keep in mind that the co-signer will be equally responsible for repaying the loan. If you can’t make your payments, they will also be on the hook.
This can strain your relationship, so it’s important to consider all the risks before moving forward.
2. Get a government-backed loan
If you can’t qualify for a traditional mortgage, you may be able to get approved for a government-backed loan.
These loans are backed by the Federal Housing Administration or the Department of Veterans Affairs, and they can offer more flexible qualification requirements.
Moreover, government-backed loans often come with lower interest rates and fees.
- VA loan- The VA loan program can be a great option for veterans and active-duty service members. The Department of Veterans Affairs backs these loans, offering more flexible qualification requirements than traditional mortgages.
VA loans can also come with lower interest rates and fees. To qualify for a VA loan, you’ll need a certificate of eligibility from the VA.
- FHA loan– The Federal Housing Administration offers a loan program that can be a good option for homebuyers with bad credit.
The government backs these loans, and they offer more flexible qualification requirements than traditional mortgages.
You can put up as little as 3.5% with an FHA loan. You’ll also need a credit score of 580 or higher to qualify.
3. Find a subprime lender.
Subprime lenders are specialized lenders that work with borrowers who have bad credit. These lenders can offer more flexible qualification requirements than traditional banks, which can be a good option for homebuyers with bad credit.
However, subprime loans often come with higher interest rates and fees. This can make them more expensive in the long run.
You’ll need a down payment of 10% or more to qualify for a subprime loan. You’ll also need a credit score of 580 or higher.
4. Look into lease-to-own programs.
Lease-to-own programs can be a good option for homebuyers with bad credit. With these programs, you can lease a home with the option to buy it at the end of the lease.
Lease-to-own programs can help you improve your credit score and save for a down payment. And, if you can buy the home at the end of the lease, you can avoid going through the mortgage process all over again.
5. Consider a no-credit-check loan.
No-credit-check loans are exactly what they sound like: loans that don’t require a credit check. These loans can be an option for homebuyers with bad credit who can’t qualify for a traditional mortgage.
However, no-credit-check loans can be expensive. They often come with high-interest rates and fees, which can be risky.
Make sure you consider all the risks before taking out a no-credit-check loan and check out mistakes to avoid when buying a house.
6. Try for a “non-qualified mortgage.”
Non-qualified mortgages are for homebuyers with bad credit who can’t qualify for a traditional mortgage. These loans can be more expensive, but they can offer more flexible qualification requirements. For example, some non-qualified mortgages can be for homebuyers with a credit score as low as 500.
To qualify for a non-qualified mortgage, you’ll need a down payment of 10% or more. You’ll also need a credit score of 580 or higher.
Before you take out a non-qualified mortgage, make sure you understand all of the risks. These loans can be more expensive, and they can be harder to refinance if your credit improves.
7. Look into state and local programs.
Some states and local governments offer programs that can help homebuyers with bad credit. These programs can offer down payment assistance, low-interest loans, or tax breaks.
Contact your state or local housing authority to find out if any programs are available in your area.
How to improve your credit score and credit history?
If you decide instead to wait to buy a house until you can improve your credit, there are a few things you can do to help.
1. Check your credit report for errors.
The first step is to check your credit report for any errors. This can help you identify any mistakes dragging down your score. You can get a free copy of your credit report from each of the three major credit bureaus yearly at annual credit report.
2. Make all of your payments on time.
One of the biggest factors in your credit score is your payment history. So, one of the best things you can do to improve your credit score is to make all of your payments on time.
This includes your mortgage, car loan, credit card payments, and other bills. If you can, set up automatic payments, so you never have to worry about missing a payment.
3. Pay down your debts.
Another factor that’s important for your credit score is your debt-to-credit ratio. This is the amount of debt you have compared to the amount of credit available. So, one way to improve your credit score is to pay down your debts.
You can do this by making extra payments on your debts each month. Or, you can consolidate your debts into one loan with a lower interest rate. This can help you save money on interest and pay off your debt faster.
4. Keep old accounts open.
The length of your credit history is also a factor in your credit score. So, one way to improve your credit score is to keep old accounts open.
If you have a credit card that you don’t use anymore, don’t close the account. Instead, keep the account open and use it occasionally. This can help improve your credit score over time.
Q: Should you buy a house if you have bad credit?
A: You can buy a house with bad credit, but it will be more expensive and harder to qualify for. If you can wait to improve your credit, you may get a better deal in the long run.
Q: How long does it take to improve your credit score?
A: It can take several months or even years to improve your credit score. The best way to improve your credit score is to make your payments on time and keep old accounts open.
Q: Can you get a mortgage with a 500 credit score?
A: Yes, you can get a mortgage with a 500 credit score, but it will be more expensive and harder to qualify for. Non-qualified mortgages can offer more flexible qualification requirements but can also be more expensive.
Q: Why is my credit score low?
A: There can be many reasons why your credit score is low. It could be because of late payments, high balances, or errors in your credit report.
Q: Can I buy a house with no money down and bad credit?
A: Yes, some programs can help you buy a house with no money down and bad credit. However, these programs can be difficult to qualify for and may require you to pay a higher interest rate.
Bad credit can make it difficult to buy a house, but it’s not impossible. Some programs can help you qualify for a mortgage and get into your own home.
If you’re patient and willing to work on your credit, you can eventually get the house you want. But, if you can’t wait, options are still available.