Home-ownership in America is at the lowest point in decades, as many people are struggling with low credit scores after the recession. Many people may wonder if they will ever be able to buy their own home. Actually, there are options available for people with bad credit to buy a home.
Several years ago, it was much more difficult to secure a home loan with bad credit. But today, lending standards have relaxed somewhat, as the US government is trying to get the housing market back on firm footing.
If you are considering buying a home with bad credit and you are saddled with low fico scores, you do have hope. Even if your current score is poor, such as below the 600’s or worse, you may not be barred from buying a home at all.
Just as important as your score is the circumstances surrounding the score. If you had a foreclosure two years ago but have since been paying your bills on time, you may be able to still buy a home. As long as you are able to show a lender that you can afford the loan to get approved for bad credit home buying and are financially stable, all is not lost.
To increase your chances of buying a home with bad credit, try these five secrets:
Save More for Your Down Payment
If you have a credit score below 580, you have to have more for your down payment. Plan on at least 10% down.
However, if you have a credit score higher than 600, you could be able to get a loan with a lower down payment. But you will be able to score a lower interest rate if you put more money down. If you put down 5%, 10% or even 20%, you will be able to get a quite competitive interest rate.
The way the lender sees it is, the more money you have in the deal, the less likely you are to default.
Consider FHA When Buying a House with Bad Credit
One of the best loan programs for people with bad credit is the FHA mortgage. FHA loans are guaranteed by the Federal Housing Administration. So if you fail to pay your loan, the FHA will pay back your lender.
That guarantee means a lot to lenders; they are willing to extend credit to relatively poor risks because their risk exposure is limited.
If you have a credit score in the 620s’, you may be able to get an FHA insured loan and put down only 3.5%. And if your score is in the 640’s or higher, you almost certainly can get a loan with that low of an interest rate.
FHA programs also have a low interest rate; it could be lower than market rates. Again, this is because the loan is backed by the Federal Housing Administration. Buying a home with bad credit is a genuine possibility if the applicant meets the FHA requirements.
Keep in mind that FHA itself does not issue loans; it merely guarantees the loan to FHA-approved lenders.
Know What to Stress to the Lender
Lenders today usually use automated underwriting to do their loans. But if you have bad credit, you may need to have a human being work on your loan from the start. That’s fine; manual underwriting can work if you have bad credit; you just need to show the underwriter that your bad credit score is not the most important part of your file.
In many instances, a bad credit mortgage loan could be approved if the applicant shows a trend of good payments over a noticeable period. You need to gain the trust of the underwriter if you want any chance of them approving financing so you can buy a home with bad credit.
Try to emphasize the good in your application. For example, if you have made on time rent payments for the last 12 months, you should get a letter from your landlord pointing this out.
Also, if you have a good level of savings, show proof of that to your underwriter. Also try to have on time payments for all of your bills in at least the last year. Even if you have poor credit from unpaid bills or foreclosures in the past, your recent history counts more.
It also is a good idea to have a low amount of credit card debt so you look like you are now financially responsible.
The key thing to remember is that a low credit score alone will not sink your application. But a bad credit score combined with high debt, lots of missed payments and no savings will most likely prevent you from buying a home.
Get an Owner Financed Deal
There will be cases where your credit is too bad or too unestablished to qualify for a mortgage loan. In that case, you can try to get a private lender to work with you. Most often, the private lender is a landlord who has a property he wants to sell but has not been able to get the price he wants.
In this situation, you may be able to get the landlord to write you a private mortgage; this is called owner financing or seller financing. It works just like a regular mortgage. You will put down a certain amount of money, often 10%. And the landlord will write you a mortgage note with similar terms to a regular mortgage.
You can set up a 15 year or 30 year mortgage if you like. Expect to pay well above market interest rates due to the higher risk for the lender. But the good news is, if you pay the loan on time, you may be able to refinance out of the seller financed note and get a regular mortgage in two or three years.
But remember, you need to get your credit cleaned up in the meantime. And make sure the loan does not have a pre-payment penalty. Even if you successful in buying a home with bad credit, you will want to be able to refinance the loan eventually with a regular lender when your credit improves.
The Bottom Line
Too many people think today that having poor credit will prevent you from getting buying a home with bad credit scores. It is true that if you don’t have 740 credit and 20% down, you will not get as favorable lending terms. But there are many options available out there today for people that have poor credit. You may need to shop around more, but bad credit house loans are available for most borrowers that have strong credentials beyond the score published by Tran Union, Equifax and Experian.