As many of us know, the process of buying a home can be extremely difficult, especially with the changes in the market brought on by the COVID-19 pandemic. However, buying a home (or trying to) can be even more difficult if you have bad credit. All the hurdles you have to overcome when buying a home are exacerbated by bad credit, and you may not know how to work around it while still purchasing the home you want. In this article, we’ll discuss how you can buy a home with bad credit and the steps you can take to help you get the home you want. So, if you’ve been looking into purchasing a home, but your credit score could be better, keep reading!
What Are the Steps To Buying a Home?
In case you are unfamiliar with or new to the home-buying process, several steps are involved between deciding to buy a home and closing and moving in:
- You need to check your credit score and determine how much you can actually afford based on your income and the amount of money you have saved.
- You choose a lender and get approved for a mortgage. After that, you can find a real estate agent, start looking at houses, and eventually put an offer in on a home you like.
- If all goes well, you’ll have a home inspection and an appraisal.
- You will close on your new house!
How Can I Improve Bad Credit Before Buying a Home?
If your credit score isn’t the best, consider actually trying to improve your score and bring it up before buying a home. There are many ways to improve your credit score, but we’ll go through a few of the most popular and effective.
For starters, you should pay down your credit cards (or reduce your total credit utilization percentage). You’ll also want to pay off as much existing debt as possible. For example, if you have car payments, personal loans, or outstanding medical bills, you should at least get them down to a manageable level.
Additionally, if you’ve been late paying bills in the past, now is the time to stop that bad habit. Make sure all of your bills are paid on or before the due date. Sometimes, even opening a new credit line and making consistent payments on it can further improve your credit score.
Tips For Buying a Home With Bad Credit
Now that we’ve talked about some of the major steps it takes to buy a home, we can talk about some of the best tips to help you buy a home with poor credit. You can approach this process in a variety of different ways, but a lot of it comes down to the kind of loan you opt for and the amount of money you have saved for a down payment.
Save Up For a Bigger Down Payment
Many lenders use a debt-to-income ratio to determine whether or not you would be a trustworthy borrower for them. However, one way to make this ratio look better to lenders is by borrowing less money. How can you borrow less money? Save up longer to accumulate more money for a larger down payment. If you put down a larger initial payment, you won’t need to borrow as much from a lender, and your mortgage payments will be smaller. This will make lenders more likely to allow you to borrow as the loan won’t be as risky.
Opt For a Private Loan
Typically, most people consider borrowing money privately from family or friends a last-resort option. However, there can be some advantages depending on the specific situation and the type of person you are. No amount of money is worth scorning your closest family or friends, but sometimes, these people appreciate making a higher return on their money compared to a savings account. Additionally, friends and family may be more flexible with the terms of your loan, won’t charge you loan fees, and may be more forgiving if you need to miss a payment or make a late payment occasionally.
Get a Co-Signer
Getting a co-signer is a great middle option between doing everything on your own and borrowing from friends or family. When someone co-signs your loan, the amount of money they make will also be considered when determining the amount you can borrow. While a co-signer won’t completely nullify your bad credit history, it can help prove you’re trustworthy. However, if you default on your loan or miss payments, your co-signer’s credit will undoubtedly suffer, and you may be in hot water with them.
Opt For an FHA Loan
An FHA loan, also known as a Federal Housing Authority loan, is a type of loan offered by the federal government to first-time homeowners, those with bad credit, or those with little savings. If your credit score is 580 or above, you are eligible to get an FHA loan as long as you can put down a down payment of 3.5 percent of the home’s value. If you have poor credit with a score under 580, you are still eligible for this loan, but you will need to save for a down payment of 10 percent of the home’s value. These loans typically have higher mortgage payments, though.
Consider a VA Loan If You’re a Veteran
This option is obviously only viable for veterans, but if you have served in the US Military, you’ll be eligible for a VA loan. These loans are partially funded by the federal government, don’t require a down payment, and have lower eligibility requirements (so veterans with lower credit scores are often approved). However, VA loans have funding fees, which will depend on the military branch you served in and the down payment you can put down on the home.
While this will only be viable for a few people, it is certainly an option for those who don’t have great credit. Obviously, most people don’t have six figures sitting around, but for cheaper homes, some people have been able to save up enough to pay cash. Also, when you avoid going through banks, your credit score won’t matter at all, so definitely make this a consideration if you can.
Buy a Mobile Home
Mobile homes are also a great option for those who have poor credit scores because they are significantly cheaper than most homes. Mobile homes have substantially lower prices, and if you buy a mobile home on land, the land itself will increase in value. Additionally, the home can be moved if you want to leave for another part of the country, which is a big plus. However, mobile homes are not suitable for tornado-prone areas of the country.
Remember, Home Buying Takes Time
Don’t be too hard on yourself if your credit score is poor or you have an otherwise bad credit history. Your credit score isn’t permanent, nor does it mean everything. There are many cases where people have improved their credit scores substantially over the course of the year, so stick to your financial plan and explore all of your options. Your dream home may not be as out of reach as you thought!