You’re in the market for a new home, but unfortunately, your credit score just isn’t the best. Buying a home with bad credit is still a possibility, but it will take some extra effort and risk on your part. There are options for homeownership for those with bad credit, especially via government home loan programs. Another option: taking time to achieve a better credit score so you can take advantage of standard mortgages.
How to Buy a Home With Bad Credit
No matter your credit score, you should always shop around for a mortgage to get the best rate. That is especially true when your credit score leaves a lot to be desired. You may find some lenders charging less in fees and interest. When trying to buy a home with bad credit, it pays to consult a loan officer with knowledge of the market and programs in the area. For example, some states offer homeownership grants to eligible applicants, and that is sometimes true on a local level.
FHA loans are a good option for those with bad credit. These loans are overseen by the U.S. Department of Housing and Urban Development (HUD), but private lenders provide FHA loans and HUD guarantees them. Down payments are as little as 3.5% of the purchase price, compared to as much as 20% for conventional mortgages. You may qualify for the 3.5% down payment with a credit score of 580. Even if your credit score is as low as 500, an FHA loan is still available if you can put down 10 percent of the purchase price.
Another plus is that there is no limit on the gift amount for a down payment. If you have relatives willing to give you a sizable amount of the down payment (or all of it), that is fine by FHA regulations.
Credit Scores and Mortgages
If your credit score is below 650, you will have a more difficult time qualifying for a conventional mortgage. That does not mean obtaining such a mortgage is impossible, but expect to pay higher interest rates.
That is why you should give serious thought to delaying home buying until your credit score trends upward. Even a rise of 20 points or so can significantly affect your interest rate. Over the life of the mortgage, you can save thousands of dollars.
Help your credit score by always paying bills on time — late payments will drag your score down more than any other factor. Reduce your debt load as much as possible, so your credit utilization rate, or the amount of credit you have versus the amount you use, is below 30 percent. Avoid opening new credit card accounts, as well as closing old ones.
Get a free copy of your credit report from the major credit reporting agencies and make sure there are no errors. If you find mistakes, contact the agency immediately and have them corrected.
How to Buy a House With No Money Down
If you qualify, there are circumstances that allow you to buy a house with no money down. If you are a veteran or currently serving in the U.S. military, you may qualify for a no-money-down Veterans Administration (VA) loan. However, applicants still must have good credit, so this serves as a strong incentive to achieve your best score.
If your credit score is at least 640, you are likely to receive approval for a zero money down U.S. Department of Agriculture (USDA) rural housing loan. Because there is no set score with this USDA program, those with even lower scores may qualify.
Your income cannot prove greater than 115% of the median household income for the area. Total monthly debt payments, including the USDA mortgage and associated costs, must not top 41% of gross monthly income.
Eligible single-family homes are located in designated rural areas and cannot exceed 2,000 square feet. Many of these rural areas are not far from those considered suburban. There is a critical caveat: Only those who cannot qualify for conventional loans with private mortgage insurance may receive USDA rural housing loans.
Can ScoreMaster Help?
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