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The World Explained In Plain English.
The World Explained In Plain English.
How to Buy a House With Bad Credit

How to Buy a House With Bad Credit

Buying a home is hard in the current real estate market. Let alone trying to buy a home with less than perfect credit - yet, it is possible! Don't know your current, up-to-date credit score - no problem. You can make a yearly request for a copy of your credit score from any of the three major credit bureaus, Equifax, Experian, and TransUnion. According to FICO, an exceptional credit score is between 800-850, a very good score is between 740-799, a good score is 670-739, a fair score is 580-669, and a poor score is anywhere between 300-579. How then can you achieve your dream of homeownership if you find yourself in a bad credit score category? Follow the below tips and tricks that have helped some buyers with less than perfect credit scores secure their dream home!


What Makes Up Your Score?

There are a variety of different credit scores, but the most frequently used score is the FICO score. FICO outlines that the major categories that determine your score are as follows, payment history (30%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%).

Payment History is a detailed record of how you pay back your debts. Do you pay bills on time? Are you late frequently? Your pattern of repayment will be reflected in this category. A late or missed payment WILL impact your credit score.

Amounts Owed show you much debt you have in total. This includes credit cards, student loans, and other loans like auto loans. If you owe a lot of money or have maxed out credit cards, you will be less likely to obtain a new loan - like a mortgage.

Length of Credit History is exactly what it sounds like; how long have you been using any type of credit. The longer your credit history is, the more trustworthy and responsible a lender or financial institution sees you as an individual.

Credit Mix shows that you have various sources of credit ranging from auto loans, student loans to credit cards. Having a variety of credit shows that in the past, you have been financially responsible and are growing in your career or lifestyle.

New Credit suggests that you are looking to take on more debt by opening a new credit card or extending an existing line of credit. Every time you make an application for a new line of credit, that counts as a “hard hit” or inquiry on your credit. Be careful when shopping not to open up too many store cards just to get discounts or sign up for other credit-hitting products.

Clean up Your Credit Score and History Where Possible

Knowledge is the first step in planning for success. Review the credit report you receive from the credit bureau. Request changes where they need to be made, or you can also meet with a credit repair specialist who will work with you, help with credit restoration, and give you tips to fix your credit score or if you have general questions on how you can do better.


Connect With a Trusted Lender

One of the best things you can do for your home search is to call a lender before you even tour a home. A good local lender can help you fix your credit score where possible and help you find the right type of loan product for your situation. Working with a lender that is well known in your community is a huge advantage. Local lenders has good relationships with realtors and other real estate professionals, which can open doors for you which might otherwise be closed with a bad credit score. Speak with family, friends, and other professionals so you can be connected with a great local lender that loves their job, who closes on time, is friendly, and has excellent reviews.


Make the Right Choice on Which Loan You Go With and Don't Be Afraid to Shop Around.

Loans are not one size fits all. Does a USDA loan, a VA loan, or a form of a Conventional loan work for you? That's a question for your loan officer. Loans like a VA loan or a USDA loan have no downpayment requirements and no set credit score requirements - great for those looking to purchase a home with no down payment. Another great option for those with a bad credit score is the Fannie Mae HomeReady and Freddie Mac HomeOne, and Home Possible programs. Make sure to shop around. Some loan types offer different rates. Getting a lower rate can save you thousands over a thirty-year mortgage.


Save Money, Ask for a Cosigner and Create a Budget

Although you're working hard to get a mortgage, something you can do to boost your chances even without a fantastic credit score is save money. Aim to save a specific amount of money each week, check on your progress then adjust where needed. Try to avoid racking up credit card debt and unrealistic spending habits. You can do this by setting a realistic budget and sticking to it! Just like your savings goals, you will want to check on your budget weekly, bi-weekly, or monthly and adjust where needed. If taking all of these steps still isn't enough, one other thing you can do when applying for a mortgage is to ask for a cosigner. A cosigner takes out the mortgage with you, is responsible if you don't make the payments on time, and helps you obtain the loan with their good credit score. This is no small thing to ask for. Make sure that if you do ask someone close to you to cosign that you don't let them down.

Making the transition from renting to homeownership can be intimidating. But buying a house with a low or bad credit score is possible! For more information on all things real estate, check out the Real Estate section of our website.

Next Here's How to Win the Home Bidding War