Are you one of the one-third of Americans who has a credit score considered “bad” by the credit reporting agencies? You might think that your poor credit will prohibit you from buying a home, but that isn’t necessarily the case.
If you are tired of throwing money away on rent and think you are financially ready to own a home but have poor credit, keep reading for information on how to buy a house with poor credit.
How to Buy A House With Poor Credit: 4 Options
In general, having good credit is going to position you to buy a house much better than if you have poor or bad credit. There are different organizations that score your credit, including FICO and Vantage. They vary in how they define your credit rating, but in general, anything below a 640 is considered poor or bad credit.
This doesn’t mean that you won’t be able to get a mortgage, though. It just means that you might have to work a little harder to find a lender willing to give you a mortgage and you may need to pay a higher interest rate. There are a number of different loan options out there. Get more info about the different types of loans here.
There are 4 legitimate options for someone with bad credit who would like to purchase a home. Just because your credit score may be poor does not mean that home ownership is out of reach.
Get an FHA Loan
An FHA loan may be a good option for someone with bad credit. The Federal Housing Authority backs FHA loans and because of this, their requirements are less strict. Someone with a credit score as low as 580 can get an FHA loan as long as they can provide a 3.5% down payment.
Compared to a conventional loan, which typically requires a credit score over 640, this makes home ownership possible for many more people.
It is important to understand the downsides of an FHA loan, however. While the biggest advantage is that it provides a way for you to purchase your home, you will end up paying additional fees and mortgage insurance that you wouldn’t necessarily pay with a conventional loan.
FHA loans require an upfront insurance fee, around 1.7% of the purchase price. There is also a monthly fee of 0.85% if you put down less than 5%. This mortgage insurance remains for the life off the loan, so you will be paying it every month as long as you hold the mortgage.
Save Up a Larger Down Payment
The average down payment in the US is about 14% of the home’s value. If you can save up more money and come up with a larger down payment, you will position yourself better when applying for a mortgage.
A larger down payment won’t improve your credit score or get you a lower interest rate, but it will indicate to the lender that you are able to handle the mortgage payments, despite having poor credit.
Making a larger down payment also increases the equity you have in the house, lowering your loan-to-value ratio. Lenders view this as a positive thing, as the more you have invested in the home, the less likely you will be to default on the loan.
Additionally, putting 20% down means you won’t have to pay for mortgage insurance, your monthly payment is going to be lower, and you’ll have more leverage with lenders, even with your bad credit.
Get a Private Mortgage
If an FHA loan is not an option, or your credit score is still too low, or if you can’t come up with 20% down, all is not lost. Getting a private mortgage is generally easier than getting an FHA loan or conventional mortgage, as they will likely not even consider your credit score.
Private mortgages could come from anyone who has the cash to help you buy the home. It could be family, a friend, or a private lender. You and the person or lender giving the money agree to the terms of the loan and set a repayment schedule and amount.
The downsides to a private loan include the potential for very high-interest rates and potential damage to your relationship with whoever gave you the loan. A private loan should be a last resort though.
Have A Co-Signer
One last way to buy a house with poor credit is to have a co-signer on your loan. If you find a co-signer, such as a family member, with good credit, they can improve your chances of getting a mortgage. Your cosigner’s name is on the loan, so if you default on the loan or the home goes into foreclosure, their credit also will suffer.
This can be a good option for someone who has a trustworthy person to co-sign. Drawbacks could be damage to your relationship with your co-signer, particularly if you default or the home goes into foreclosure. Co-signing on a mortgage loan can be risky, especially if the person who is co-signing does not have the money to make the mortgage payments if you cannot.
The Bottom Line
While home ownership is not completely out of the question for someone with poor credit, it might require some creativity and work on your part to find a financial source to provide you with the loan. Now that you have some options for how to buy a house with poor credit, you can learn more about mortgages and the mortgage process on our website.