Buying a home is one of the most exciting things that you can do. It’s also one of the most stressful because there are so many moving pieces that have to happen during the home-buying process.
One of the most important ones is your ability to get a loan. That determines whether the deal goes through or not. Without financing, there’s no deal. Most people think that with poor credit the deal is dead in the water. Want to know how to buy a house with poor credit?
Read on to find out why this is a myth and how you can buy a home with a bad credit score.
Why Credit Score Matters When Buying a Home
Lenders often look at your credit score and make a judgment. They don’t look at your income, nor do they look at your character. Those three numbers tell lenders whether you’re a credit risk or not.
Lenders that see you as a credit risk will give you a loan with higher interest rates. That means that you’re going to pay more money for the loan. The higher the risk, the more you pay.
Some lenders have tightened up their standards for lending after the 2008 subprime mortgage crisis, which triggered The Great Recession. They won’t bother to lend to you and some people aren’t bothering to apply for a home loan.
That’s not a reason to get discouraged, though. You can learn how to buy a house with poor credit even when some lenders aren’t willing to take a risk.
How to Buy a House with Poor Credit
Buying a home with poor credit requires a little more leg work on your part. It’s worth it in the end, especially when you move into your new home. Here are the things you have to know to buy a home with bad credit.
Your Financial Picture
You have to start off buying a new home by understanding what your financial picture looks like. This is the entire picture – your income, outstanding debts, standard expenses and a current copy of your credit report.
You need to figure out where you can make improvements in your financial picture. You could make $100,000 a year, which would look great to many lenders. But if you spend $99,000 a year on expenses and paying back debts, you need to make some adjustments.
Find a Lender
Your financial picture will tell you a lot about your ability to finance a home purchase. There are plenty of lenders out there who will lend money to you, even with bad credit.
What you want to do at this point is to shop around and find a lender that you can trust. Some lenders like Bonsai Finance are willing to lend money if you have bad credit.
You just have to shop around to find the right one for you. When you do shop around, you want to make sure that lenders are using a soft credit pull as a preliminary option. A hard credit pull could negatively impact your credit score, dragging your score down even further.
Look for Creative Financing Options
Home lenders may give you several options to finance your home. Some of the home-buying programs available offer low-interest rates and require little money down.
There are lending programs for veterans, first time home buyers, and those looking to purchase in rural areas.
These loans are available even if you have poor credit. For an FHA loan, you do have to meet the minimum requirement of a 500 credit score. If you want to have a low down payment threshold, you need to have a 580 credit score.
Improve Your Credit Score
Is time on your side before you purchase a home? If so, then you can work to improve your financial situation and your credit score. The best way to do that is to look at your credit report and identify opportunities to improve.
For example, if your credit score is down because you had a period where you missed several payments, then you’re going to need time for the impact of those missed payments to fade away. You have to make all of your payments on time, too.
In other situations where your credit score is low because you have a high debt to credit ratio, then you need to focus on paying down your debts. In that case, you’ll have to work hard by cutting expenses or getting additional income to pay those debts down faster.
Put More Money Down
If you want to really show lenders that you’re financially responsible and you can pay back a home loan, you can put more money down on the home purchase.
The more cash you can put down on the home purchase, the less risk banks are taking on the home purchase, making it easier for them to lend money to you.
How can you put more money down if you don’t have anything saved up? You can borrow money from family and friends to cover the down payment.
Your state is likely to offer a homebuyer assistance program, which gives you the ability to save up for a down payment that can be matched with a grant.
Buying a Home Is Possible with Poor Credit
Your credit score can be used as a major determining factor in showing your ability to get a home loan. Without it, you may have some trouble buying a home.
When you know how to buy a house with poor credit, you open up many more opportunities that you may not have been aware of. You can take part in government-backed programs and find a lender who is willing to work with you and guide you through the home buying process.
The main thing you need to show is that you are financially responsible and you have the ability to pay back the loan.
If you do those things, then you’re going to be able to move into your dream home. Would you like some more home tips? Check out our blog posts that show you how to decorate a home and how you can renovate your home on a budget.