Mortgage rates are at an all time low and for many people, now is the right time to become a home owner. Some people are under the mistaken impression that you must have perfect credit in order to buy a house. That’s truly not the case — there are plenty of opportunities for people with poor credit to start on the journey toward homeownership and end with a set of keys to their very own home in their hands. But it’s true that buying a house with bad credit can be a challenge that not everybody is equipped to face.
If your credit isn’t exactly shiny and pristine, there’s still hope for your dream of owning your own house. Assess your situation, do what you can to improve it, and you’ll be working on the fun part of home buying (the shopping part) before you know it.
Face the music
Maybe you don’t know your exact credit score or what’s on your report … you just know it’s, you know, not great. That’s perfectly understandable and nobody is judging you for shrinking from the truth a little bit, but the first step toward fixing the problem of a poor credit score is understanding exactly how bad the situation is so that you can start addressing the low-hanging fruit and easy-to-tackle issues first.
So if you don’t know what your credit score is or have access to what’s on it, now is the time to procure a copy of your credit report, which you can request for free. You might be nervous about what’s on the report, and that’s entirely natural, but refusing to look at it isn’t going to solve any problems — so if it helps, just tell yourself that your score is as low as it could possibly be and you owe millions of dollars on your credit report. Maybe that’s true, but if your situation is even a little bit better, you’ll feel pleasantly surprised!
Check for errors
Believe it or not, there are mistakes on credit reports just like any other document, and if you haven’t been paying attention, then you might find some on your report. Getting mistakes removed can feel tedious and time-consuming (and, let’s face it, it is), but you’ll be improving your credit without having to spend any money doing it, and that can be a solid payoff all on its own.
Take that copy of your credit report and run down it line by line to see if you can find anything that’s worth disputing. Obviously, larger line items are going to be worth more time than smaller ones, but everything that doesn’t belong on your report is worth disputing. It might take some untangling to get there, but it’s going to make a difference in the end on how quickly and easily you get in the door of a home of your own.
Do what you can to improve where you can
You can still buy a house even if your credit isn’t perfect or very good — and we’ll get to the specifics of how in a minute. But the fact of the matter is that you’re going to get the very best deal on your mortgage loan if your credit is in decent shape. That’s important because it affects how much money you’re going to pay overtime on the house; the lower your mortgage rate, the less you’ll pay, and you won’t be able to get a low rate with poor credit.
So instead of throwing your hands up and accepting your fate, start looking for ways to improve your credit score right now. First and foremost, if there are any bills you can pay automatically, sign up to do so; late payments will wreak havoc on your credit score. Once you’re paying all your current bills regularly and on time, start tackling the highest-interest debts first. If you’re in default, see if you can set up a payment plan with whichever entity now owns the debt; that may take some investigating to figure out. But any efforts you can make to improve your financial situation and your credit now will benefit you later when you’re actively looking for a house.
Meet with a housing counselor and take classes
The Department of Housing and Urban Development offers resources for buyers (especially first-time buyers) who are struggling with credit issues and affordability. It’s well worth checking out because they can often direct you to additional resources (even grants and loans for down payments) that could make all the difference in your ability to reach the finish line. Visit https://www.hud.gov/buying/localbuying to see if HUD offers any programs in your area.
Know your loan options
There are a few different types of loans that are specifically geared toward buyers with poor credit or financial struggles, including FHA loans, USDA loans, or VA loans. If you’re a veteran, then it’s a good idea to contact the Veterans Administration and ask for information about VA loans, which require a credit score of 620 and often offer very good rates even for borrowers with credit challenges, and you can get a loan with no down payment at all and with no private mortgage insurance (PMI) penalties.
If you have a credit score of at least 580, then you can qualify for an FHA loan, which is a loan with a lot of flexibility — it’s not restricted to first-time homebuyers, for example, and the loan requires just a 3.5% down payment (although if you can put more down, you’ll get better terms. Employment qualifications for an FHA loan can also be looser.
A USDA loan is available only in some rural areas for some borrowers who have a low-income range for the area. These also require a credit score of 620 and don’t require a down payment or PMI, so depending on your income and where you’re buying, they can be a good option for some borrowers.
Private mortgage loans are also available even to borrowers with poor credit, but you may need to make one or more of the concessions listed below.
Pay upon PMI
If you don’t have a full 20% down to bring to the sale, it’s standard procedure for the lender to charge an additional mortgage insurance every month on top of your payment. This is usually calculated as a percentage of the total loan; it can be well worth it for buyers to pay PMI if it means building equity and working up the homeownership ladder.
Offer a bigger down payment
Alternatively, if you have poor credit but you happen to have good access to a lot of money, then it might make sense for you to offer a larger-than-average down payment to offset your lack of credit. Some lenders will accept a riskier borrower with more skin in the game, so to speak, so it’s worth a shot if you’re able to come up with those large amounts of money before your home purchase.
Bring a co-signer to the table
Borrowers whose credit isn’t good enough to get a loan on their own also have the option of bringing a co-signer to the table who can also be financially responsible for the loan. This is a big deal, and most co-signers will be family members — all of the normal advice about entangling yourself financially with family members applies even more stringently here, but if there are no other options, bringing a co-signer in can get a deal to close that was otherwise lost for good.
Be realistic about your price range
It’s incredibly important for homebuyers who are more financially challenged than they would prefer to be ultra-realistic about the budget they can afford and how they plan to pay for it. The last thing you want on your credit report is a foreclosure, and the best way to avoid one is to make sure you’re not getting in over your head in the first place by shopping aggressively within your price range and aiming low if at all possible. You aren’t obligated to stay in the home you buy with poor credit forever; it can be a jumping-off point to something better, but you have to get your foot in the door first, which might mean compromising here and there.
Refinance when you’re settled
Homeownership can help boost your credit in a big way; that financial stability and equity building will only benefit you over time. And after some time, you can take advantage of your newly polished credit to refinance. Depending on what mortgage rates are doing, you might even spend less money every month on your mortgage, be able to get rid of your PMI, or otherwise tweak your payment to your best advantage.
There’s no reason why you can’t buy a house with poor credit. It just is going to require a little extra work and planning on your part, but the end result — a home of your own — will be worth all the sweat and tears you put into it.