Buying a house can be an exciting yet confusing process. It can also be frustrating when you are trying to buy a house with bad credit and don’t know where to turn for answers. Many people rent with the dream of going through the home buying process and purchasing their first home. But if you have bad credit you may think homeownership is out of reach.
Can You Buy A House With Bad Credit?
The answer is yes. But what does a bad credit score mean, and what are the types of home loans available to those with bad credit? We’ll answer those questions as well as detail the necessary steps you need to take to buy a house if you have bad credit.
Mortgage lenders and the Federal Housing Administration (FHA) look at a credit score range when considering a home mortgage loan. A credit score between 669-580 ranks your credit as “fair,” and is considered a higher risk for a mortgage lender. Lenders view a score of 579 or less to be “bad credit.” Scores this low can make finding a home loan challenging, but not impossible.
Your credit score tells a lender about your spending habits, payment reliability, and the likelihood of mortgage repayment. A low credit score means you’re a higher risk for a lender but does not have to mean your dream of owning a home has to come to an end.
How To Buy A House With Bad Credit
First, find out your credit score by getting a credit report. There are sites where you can get a free credit report like FreeCreditReport.com. They provide credit reports from the 3 credit bureaus Equifax, Experian, and TransUnion at no charge to you.
Depending on your credit score, you may have work to do, and it may take some time to get your credit back on track.
How to Improve Your Credit Score
Focus on these two financial habits to help you boost your credit score if it’s lower than 580:
Improve your payment history: Payment regularity is a crucial factor used to determine your credit score. With a plan for regular on-time payments on your debts, you will improve your credit history & score with every payment.
Pay down your overall debt to increase your debt-to-income ratio: Your available credit is also a big factor in your credit score. If you are maxed out and have no credit, it will be a challenge to improve your score. Focus on paying down debt to give yourself a credit cushion, and your score will rise.
For assistance, consider a credit repair service to help get you on track for buying a home. In fact, once you get your free credit report you may notice some errors that are bringing your credit score down. A credit repair service will help get those errors fixed so your credit score can start moving in the right direction and help you get a better rate on a home loan.
Loans For Buyers With Bad Credit
To help applicants with bad credit buy a house, the FHA has a loan insurance program for lenders. However, not every lender may offer FHA loans so be sure to shop around.
FHA-backed loans help you:
- Qualify for low down payments, possibly as low as 3.5%.
- Avoid the requirement to verify two years of employment.
The downside? You will likely pay a higher interest rate on your home loan.
When your credit score is above 580, you could qualify for a mortgage with as little as 3.5% down and allowed a loan-to-value ratio (LTV) of 96.5%. A loan-to-value ratio is used by lenders to describe the loan size you’re taking out compared to the value of the property you want to purchase.
For example, you could purchase a $200,000 home in Sacramento, CA with an LTV ratio of 96.5%, meaning you couldn’t borrow more than $193,000, making $7,000 (or 3.5% of the home’s purchase price) your minimum down payment. With a score of less than 580, you will need a larger down payment of at least 10%, and you may be capped at a 90% LTV.
VA Loans: Military veterans with a credit score of at least 620 have access to Veteran’s Administration (VA) loans. If you can boost your credit score to qualify, additional VA loan benefits include:
- No down payment
- No private mortgage insurance (PMI)
- Lower interest rates
USDA loans are available for homebuyers who are lower-income and considering buying in rural areas. The United States Department of Agriculture (USDA) also requires a credit score of 620, but there are additional program benefits, including:
- No down payment
- No private mortgage insurance (PMI)
- Lower interest rates
Take steps now to improve your credit score and move closer to your dream of homeownership. Depending on your circumstances, you could qualify today for an FHA, VA, or USDA loan.
Do your homework to find mortgage lenders who will work with you to apply and qualify for these financing options so you can buy a house even with bad credit.
This post first appeared on Redfin.com. To see the original, click here.