How To Buy a Home With Bad Credit: Do’s and Don’ts

How To Buy a Home With Bad Credit

The average credit score is 711, an increase over the average score of 705 in 2018. That doesn’t tell the whole story about credit scores in the United States.

It seems that Baby Boomers are the only generation with credit scores above 700. Gen Xers are just below 700, while Millennials and Gen Z hover between 675 and 680.

That means there is a lot of people with bad credit out there. The people most affected are most likely to want to buy a home.

Do you want to know how to buy a home with bad credit? It is possible, you just have to know what all of your options are.

Keep reading to find out the top tips for buying a home with bad credit.

1. Assess Your Credit Situation

Do you know how bad your credit score is? This is the time to discover what you’re up against. It’s not a time for buying your head in the sand.

The more you know about your credit score, the more power you have to do something about it.

Pull a copy of your credit score from the major credit bureaus. Look closely at your credit report for errors. If you spot them, get them corrected as soon as possible.

Check your credit score with Vantage Score and FICO. These are the main scoring agencies that lenders use.

2. Pay Down Debt

Did you know that there are several factors that determine your credit score? Your credit utilization rate, credit history, types of credit used, and payment history are some key factors.

Some of these factors get weighted more heavily than others. Recent late payments impact your credit score more than late payments made three years ago.

The most influential is your credit utilization rate. This is the amount of debt you carry versus the amount of credit available.

If you have two credit cards, and they’re both maxed out, your credit score drops.

Pay down your debt to lower your credit utilization rate. A ratio of 30% is a good sign you’re responsible with credit and your score will increase.

3. Show Steady Income

Banks scrutinize every aspect of your financials before they underwrite your loan. Most lenders want to see steady income for at least two years.

If you can show a long history of steady income, you can find a lender to work with.

4. Save for a Higher Down Payment

Home lenders have to make sure you can pay back your loan, or else they’ll lose money. That’s why they rely on your credit score so much.

The best way to alleviate the lender’s risk is to ask for less money. That means you’ll need a higher down payment. If you can come up with 20% or more for the down payment, you’ll improve your chances to get approved.

A higher down payment lowers your interest rate as well.

5. Work With a Real Estate Company

There are real estate companies that own properties, sell them, and offer to finance the purchase. These companies have a broad range of homes for sale and you finally own a home.  

Since they own the home and provide financing, they’re more willing to work with buyers with bad credit. Find one in your area.

6. Find Lenders Willing to Work With You

Can you get a mortgage with bad credit? You can even if you have a credit score in the 500s.

You might even qualify for a government-backed loan like a first-time homebuyer’s loan. The Department of Housing and Urban Development has the FHA loan program.

This lets first-time homebuyers obtain a loan with a low down payment. You don’t need to come up with 20%, which puts homeownership out of reach for many first-time homebuyers.

FHA loans let you get a loan with as little as 5% down. You only need a 580 credit score to qualify. If you have a lower credit score, you might need a 10% down payment.

There are other lenders that work with bad credit scores. They might have you go through credit counseling first.

They’ll lend money for the home purchase, but they’ll charge a higher interest rate. Make sure you shop around and assess all of your options.  

7. Get a Co-Signer

There are lenders that are reluctant to lend money to you because you have bad credit. You might be in a financial situation where you need to buy a home, but don’t have access to a large sum of money for a deposit.

There may be an alternative that you can use. You might not have good credit, but there’s a chance someone close to you does have good credit.

The co-signer doesn’t own the home, but they do become partially responsible for paying the home loan.

Use this as a last resort. The co-signer is putting their financial health on the line for you. If you don’t come through with mortgage payments, they’ll be responsible for them.

That will probably put an end to the relationship.

Make sure you have a written agreement in place to protect you and the co-signer.

How to Buy a Home With Bad Credit

You have a lot of financial options to buy a home, even if you have bad credit. Learning how to buy a home with bad credit starts with your credit score.

Find ways to pay down your debt to improve your credit utilization rate to bring up your score. If you can’t do that, don’t give up.

Homeownership isn’t out of reach. You do need to get creative and think outside the box. Follow these tips and you’ll get into your dream home in no time.

Did you find these tips helpful? You’ll get a lot out of the other real estate articles on this site. Check them out today!