How to Buy a House With Bad Credit

 

Do you need to know how to buy a house with bad credit home loans? The first thing you should realize is that credit is a very important area when it comes to home loan approval. If you need to buy a home with less than stellar credit, the first thing you will want to do is begin improving your credit. We’ll look at how to do this below, but first, let’s explore the options for bad credit home loans.

FHA Mortgages

FHA home loans are not need-based mortgages, but they do provide low down payment options and the FHA has credit score requirements that include 500-579 credit score range loans (requiring 10% down) and mortgages at maximum financing (3.5% downpayment required) for those with credit scores at 580 or higher.

Please note that those credit score ranges are the FHA loan program guidelines, NOT lender standards, which may be higher. Those with bad credit may get closer to home loan approval with an FHA mortgage if they are able to make a higher down payment.

USDA Mortgages

USDA mortgages are need-based home loans requiring a FICO score of at least 640 in many cases. USDA loans may feature no money down options, but those with bad credit should consider making a down payment as a compensating factor–this gets some borrowers into a loan they otherwise may have been turned down for.

Bad Credit Home Loans

You may find a conventional lender willing to offer you a conventional mortgage that is not government-backed. But as the credit reporting agency Experian reminds, “Unfortunately, getting approved and getting a good interest rate aren’t the same thing.” Your bad credit home loan may be approved with a higher interest rate, making the loan more expensive over its term.

Consider this advice from Experian before you agree to a bad credit home loan. “Because mortgages are often very large loans that take decades to repay, even a 1% or 2% increase could lead to paying tens of thousands more in interest over the lifetime of your loan.“ That is why it pays to shop around for the right lender AND take more time to prepare your credit ahead of your loan application.

Repair Your Bad Credit

Any delinquency, missed payment, or late payments in the 12-24 months leading up to your mortgage application can hurt your chances at loan approval so this is the first place to begin repairing your credit. On-time payments every time for at LEAST 12 months ahead of your application is the best policy.

Yes, it takes discipline and hard work to do this, but the results–a higher credit score that you did NOT pay a third party to achieve–are definitely worth the effort. There are other steps you will need to take to repair your credit including reducing your debt and paying down credit cards well below the 50% mark on your credit limit.

Start working on your credit long before you need to consider bad credit home loans. If you take at least 12 months to save, pay down your cards, and pay on time every time, you will get much closer to home loan approval.