Yes, you can buy a house with bad credit. Having a bad credit score will limit your financing options, but you can still become a homeowner. The first step is to know what kind of credit score you’re working with by obtaining your credit report from each of the main credit reporting agencies – Equifax, Experian, and TransUnion.
A FICO Score below 670 is considered less than stellar. A fair score is 580 – 669 and a poor score ranges from 300 – 579. Read on to learn how you can make your dream of owning your own home come true even with bad credit.
If you need to buy a home now but have a less than stellar credit rating, there are some unconventional financing options you can consider when buying a home with bad credit. These include:
If you’re a first time home buyer or haven’t bought a home recently, you may qualify for a mortgage loan backed by the Federal Housing Administration. You will be able to buy a home with bad credit without having to put down a higher down payment or having to pay a higher interest rate.
Most FHA mortgage lenders require a minimum credit score of 580 but you can qualify with a score of less than 580 if you can pay a higher down payment such as 10%. The catch is that you’re required to pay private mortgage insurance premiums.
Are you an active-duty member of the military, a veteran or a qualifying spouse of a veteran, you could qualify for a Veteran’s Administration (VA) home loan. This type of loan is backed by the Department of Veteran Affairs and as such has less stringent guidelines.
If you’re able to get a VA loan, you will be able to purchase a home with bad credit and no down payment and won’t be required to pay private mortgage insurance. You will only have to pay a one-time funding fee at closing or have it incorporated into the loan and will also benefit from lower interest rates. Most lenders will require you to have a credit score of 620 to qualify.
Qualifications for this United States Department of Agriculture (USDA) backed home loan include being in a low-income bracket and looking to purchase a house loan in an eligible rural area.
With a USDA-insured loan, you will be able to purchase a home with bad credit and no money down. You will also benefit from lower interest rates and won’t have to pay private mortgage insurance payment. USDA loans also require a credit score of at least 620.
Having bad credit limits the mortgage options you have and also the amount of home financing you can get. If you have bad credit but good income and can put down more money upfront – pay a down payment of 20% or higher, you might be able to get a conventional mortgage even with a poor credit rating and be able to buy a house with bad credit and 20 down.
If you have plans to become a homeowner in the next few years or have a credit score of less than 500, the best way to buy a home with bad credit is to work on improving your credit score first. When you apply for a mortgage loan with an improved credit score, you will benefit from lower rates which will save you thousands in mortgage interest payments. You will also have more financing options.
Start by scanning your credit report for potential errors and have them fixed. Every time you make regular on-time payments for your bills and debts, your payment history, credit history and score improves. Paying down your existing debts will also increase your debt to income ratio and give you a credit cushion.
While having bad credit can make it harder to buy a home, homeownership is not out of reach if you have a bad credit record. Having a bad credit makes it more difficult to buy a house but you can still buy one. If you decide to take out a mortgage now, you may qualify for an FHA, VA or USDA loan that will allow you to buy a house with bad credit. You can also wait and work to improve your credit score so you can get a mortgage with more friendly terms.
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