Are you tired of writing a rental check to your landlord every month?
Have you been dreaming of owning your own home but worried you can’t get a mortgage due to bad credit and a low FICO score?
The good news is that it’s possible. You might still be able to be approved for a mortgage with bad credit. You can even begin building equity when you pay your mortgage payment on time.
But how can you get a finance company to approve your mortgage?
In this article, you’ll learn the options for getting a mortgage and what you need to do to be approved by a lender.
Without further delay, here’s how to buy a house with bad credit.
The Facts: How to Buy a House with Bad Credit
If you have bad credit you can still get a mortgage. But you might have to agree to pay a higher interest rate. Review this checklist to learn more.
In addition to paying a higher interest rate, you may have to put down a larger down payment than homebuyers with a good credit score.
How do you define a bad credit score? Financial lenders consider FICO scores beginning at 740 and above to be good credit scores. A perfect FICO score is 850.
If your FICO score is below 640, it could be difficult to convince financial lenders to loan you the money for a mortgage.
While your friends might tell you it’s impossible, there are steps you can take to get approved for a mortgage even when you have bad credit.
Here’s what you need to do.
1. Learn Your FICO Score
There are ways you can find out your credit score. And it won’t cost you a dime. Companies online like Credit Karma will inform you of your credit score.
You can also learn it from credit card companies and other financial institutions such as your bank.
To learn your credit score, you need to obtain information from three companies:
People have three credit scores. Find out your score from each these companies.
Lenders combine these three credit scores to make a decision whether they are willing to give you a loan for a mortgage. These companies will provide you with a free credit report once a year.
2. Review your Credit Report for Errors
Lenders calculate FICO scores from the data in your credit report. But it’s possible that the reports contain errors.
An example could be a utility bill that you’ve already paid off, but the negative information never got removed from your credit history after you paid your bill. That’s why you need to check every negative credit record.
Once you locate the errors, you can dispute the errors with Equifax, Transunion or Experian. Once you ensure all the data is accurate, you’ll have a better picture of your actual credit history.
3. High-Interest Loans
If you have a low credit score, lenders may approve you for a high-interest loan.
Lenders want to protect themselves from people who have a history of being late paying their bills or not paying them at all. If you agree to this interest rate, you can be approved for a mortgage.
A higher interest rate will increase your monthly mortgage payment. For example, if you borrow $200,000 at a 5% interest rate, your monthly payment will be over $1,000.
But this doesn’t include home insurance costs that are required for a mortgage or property taxes.
4. Consider a Larger Down Payment
If you have the money to put down a larger down payment, a lender might be more willing to give you a loan. You might even be approved for a loan with a normal interest rate rather than a high-interest rate loan.
Putting down more money up front will make a lender think you are more inclined to pay your mortgage because you have more money invested. This demonstrates to your financial lender that you agree to take on a larger risk.
With a down payment of 20% or higher toward the purchase of the home, you’ll increase your odds of being approved by a lender. Even if you don’t have a stellar credit score.
5. Building Up Your Credit Will Help You Get Approved
If your credit score is so poor that you can’t be approved for a mortgage right now, you can rebuild your credit score. Here’s what you need to do:
- Credit card debt: Pay off your credit card debt as much as possible. If you still have a credit card, pay off a little more than the balance. Lower credit card debt means a higher FICO score.
- Bills: Pay your bills on time or even early each month. You can arrange auto pay with the utility company or organization so they take your payment from your bank account when it’s due. Consistent, on-time payments do reflect positively on your credit history.
Once you improve your credit score, reapply for the loan and you might be surprised at the good news.
6. Apply for an FHA-Insured Loan
The Federal Housing Administration insures federal loans. They’re called FHA loans. The credit requirements for FHA loans are lower than requirements of private lenders.
Applicants can qualify for an FHA loan if they make a down payment of only 3.5% of the home’s buying price. However, you must have a FICO credit score of 580 or higher to be eligible.
Sounds too good to be true? What’s the catch?
The first thing you need to know is although the Federal Housing Administration insures FHA loans, traditional mortgage lenders originate them.
This means although you can be eligible for an FHA-insured loan with a 580 FICO score, it’s up to the lender if they want to approve you. You can still be denied by a lender.
FHA loans can result in financial penalties. With a traditional lender, you can cancel your private mortgage insurance once you build up enough equity. With an FHA loan, you cannot cancel for the entire life of the loan.
How to Buy a House with Bad Credit Revisited
Now you know six important facts about how to buy a house with bad credit. As you can see, it is possible but it comes along with risks, penalties and higher payments.