Ben Todd | Apr 16, 2017 | 3
How to Buy a House with Bad Credit (2017 Edition)
The American dream is to own your own house. However, this dream is, for many people, just a dream.
It’s even more of a dream if you try buying a house with bad credit in 2017.
Buying a house with bad credit is no longer as easy as it was and indeed, even keeping a home from foreclosure is hard.
People are losing their houses left and right, jobs are being scaled back at an alarming rate, and the American economy is on the point of collapse.
All the old rules have now changed. In this new environment, the same loan rules don’t apply now. Credit history is even more important than it was before.
So, how to buy a house with bad credit? Is buying a house with bad credit still even possible?
Yes, it is still possible to buy a house with bad credit. There are a few options out there (even in today’s recession) that can avail you a home.Indeed, if you know what to look for, a recession can even afford you some amazing deals on homes.
However, many of these opportunities will depend on having good credit.
What sort of credit do you need to buy a home?
The FICO credit range is this:
- Excellent Credit: 781 – 850
- Good Credit: 661-780
- Fair Credit: 601-660
- Poor Credit: 501-600
Typically, you’ll need to sit in the Fair Credit range to be considered for a mortgage. Good and Excellent credit will provide you with much better interest rates.
But if you don’t have good credit, there are a couple ways you can still get a mortgage.
Best Ways to Buy a House with Poor Credit
Repair Your Credit Then Apply for a Mortgage
The first option is perhaps the most common sense, but over the long run it can save you thousands and thousands.
You have poor credit and this is a problem when it comes to getting a mortgage. Spending some time to repair your credit — even a little bit — can mean the difference between a mortgage approval and a reject.
It can also save you significant amounts in interest rates as better credit will give you better rates.
How to Repair Credit History
Here’s the basic steps to repair your credit. Even spending 6 months can make
1. Find out your credit history
That means you need to check your credit history and find your credit score. There are two ways to do this: the fast convenient way is to use a website to check your credit score for free or write to all three credit agencies and formally request your free credit report (allowed once a year by the Fair Credit Act).
You can also sign up for free with a website like Credit Sesame to check your credit score — no need for a credit card, monthly subscription, or anything else.
2. Look at your reports and see if you can find credit errors
Credit errors are not uncommon. It’s worth the time looking through your credit reports to see if you can spot errors.
Note that you’ll need to see an official FICO score (free credit history websites like Credit Sesame, Credit Karma give you a non-official FICO score, though it’s very close) to see exactly the same report lenders will see.
If you do, you can challenge the error with the agency that reported it (e.g. Equifax) and they have 30 days to investigate and fix it (if it’s true).
Your credit score may improve at that point. If you are in the borderline area between good and bad credit, this could be enough to move you to the “accept list” for getting a traditional mortgage. But in most cases, it won’t be enough.
3. Pay off all credit cards and debts you owe
If you owe money on credit cards, pay them off right away or call them up and work out a payment plan. Your credit score won’t improve if you owe money and are missing payments or have creditors sending the debt collectors after you. Settle your bills so your credit can improve, otherwise it will not.
You can always work out the debt in payments to your creditor or negotiate debt consolidation to lower the amount you owe to make payments easier.
4. Use Credit to build credit
If you don’t have a credit card, make sure to get one. The idea is to use credit to build credit. Credit cards are the best way to do that, student loan payments, mortgage payments, etc. But properly using a credit card is a sure-fire way to improve your credit. What you do is make small monthly payments on your card, ensuring that you pay it off in full EVERY month. Now, many people find that they cannot get a credit card when they have bad credit. There are two ways around this.
You can apply for a secured credit card like Open Sky Visa Credit Card that’s designed for people with bad credit; this entails putting a deposit on the card which becomes the credit limit of the card.
This is usually 500 or 1000 dollars. After a year (or two depending on your bank) of good use, the secured credit card becomes a normal credit card and you are refunded your deposit.
The other way is to get an unsecured credit card for people with bad credit.
This is a normal credit card given to bad credit clients, but the card will usually have higher interest and other penalties associated with it. Either way, you are going to have to live with the limitations of the card, at least for a year so you can build your credit up. Remember, it’s only a temp situation.
5. Bonus Step: Save Up for Downpayment
While building your credit up for a year or two, use the time to save up a nice downpayment on a home. After a year or two of saving money and rebuilding your credit, you’ll be in a GREAT position to buy a home as your credit will be MUCH better and you’ll have a downpayment to help sway the mortgage lenders. It will be unlikely that you won’t be able to get a mortgage at this point. All it takes is some careful planning and responsibility on your part for a year or two.
Put Down a Large / Larger Down Payment
You can get around bad credit if you can put down a larger down payment. If your credit score is below 580, you’ll have to cough up more for the downpayment — there is no choice.
You might expect to put down say 20% or more to compensate for a very low score.
A larger than normal down payment signals to lenders that you can keep up with the loan payments and are less likely to default. Putting down more up front also increase your home equity right away which lowers your loan to value ratio.
Basically, putting more money up front lessens the risk of the lender. If your credit is very bad, a large downpayment may be the only option to get a mortgage.
Get an FHA Loan
The Federal Housing Administration backs a certain kind of loan called the FHA Loan. The guidelines for FHA loans are more relaxed than regular mortgages. The Department of Housing and Urban Development — the government organization that manages the loans — states you can qualify for an FHA Loan with a credit score of at least 580, if you are able to come up with a downpayment of 3.5% or more.
A conventional mortgage loan would require you to have a credit score of at least 620.
There are some downsides to FHA loans such as a higher insurance fee (which lasts the entire term of the mortgage). So you will incur slightly higher month to month costs to your loan payments that you’ll have to calculate in.
Get a Private Mortgage
Most people look at mortgages from big lenders first. However, the big institutions are often strict with their requirements (one being decent credit) and won’t likely make exceptions.
However, it’s possible to seek out a private mortgage loan. These come from any source willing to provide the funds — a private lending institution, friends, family, or any other source.
You can try your hand at some of the big online lenders like Lending Tree.
This allows you to essentially ignore your poor credit score to buy a house.
If you find a private lender (such as an online mortgage lender), you may pay higher interest rates for the loan. If you borrow from friends and family, your relationship could take a hit if you can’t make payments.
Make Your Case to a Lender
Lenders use automated systems to determine your mortgage eligibility. A big part of that is reliant upon your credit rating. So you may get an automatic rejection if your score is too low. However, it’s still possible you might quality. Lenders have the ability to underwrite your loan, which means they can ignore your score if they deem you are still able to meet your mortgage payments (you are financially secure in other ways).
This might be proving you’ve been paying stable rent payments for a few years or you have large savings, or you can put down as a significant downpayment. Having a high income with low debt also can go a long way to show your eligibility. If you have existing debt, it may or may not be a deal breaker. For example, having a large amount of consumer debt is bad, but having student debt is ok.
You’ll also need to explain why you have bad credit to the lender.
The bottom line is that if you have other factors that can offset your bad credit score, a lender can still give you a mortgage.
The other option is to pursue what’s called an “Owner Financing” (also called Seller Financing) solution. This is probably the best deal you will be able to get. You want to look at a Lease-Option with owner financing, as this is the safest bet for both owner and buyer.
Here are a few reasons why Lease Option Owner Financing is a good solution.
- When you entering in the lease-option agreement with the owner, you are allowed the live in the home as if you actually own it. It’s practically “your home.”
- The details of the arrangement are pretty simple. You sign an agreement with the owner of the property in which you rent the home for a period of time (usually a year or two) and as soon as you qualify for a home loan within the agreed time period, you buy the house at the originally negotiated price. You are basically “leasing” the home with an option to “buy” it. This is actually a great arrangement since the owner overlooks your bad credit and you get a few years to fix it up and prove to the banks you will make a good loan candidate. You get to enjoy the following benefits:
- No dealing with landlords. You can treat the home as yours, meaning you can make whatever renovations you wish.
- As the home appreciates in value, you get to “cash in” on that increased equity when you buy the house. This is because you buy the house for the original negotiated price. Since house prices tend to increase with time, your house will likely be worth more than when you first “leased it.” Buy the house at the lowered price and all the equity is yours. You are essentially locking in the tomorrow’s market price today.
The biggest advantage here is that you can get this deal signed with bad credit or even no credit. It’s difficult to buy a house with no credit or to buy a house with bad credit. This Lease Loan option gives you that.
However, the challenge is to actually find a seller willing to do it.
If you are in a slow market where the seller is desperate to sell, this option might work out. In a market where there is a high turnaround of sales, sellers probably won’t want to go with this type of arrangement.
The Final Word
The ultimate cause of your problems is your bad credit. You should try and fix it as soon as possible. Now I know you are thinking “not another bad credit lecture” but hear me out.
No matter what solution you find in terms of getting a mortgage loan with bad credit, you are going to end up paying more money.
Should you be able to convince a normal bank to give you a mortgage loan with bad credit history (and as of the end of 2017, unlikely without a big down payment, you are going to pay through your teeth in interest rates.
Now it might be possible to find a bad credit online with a nontraditional mortgage lender, as stated previously in the article, but you are also going to pay sky-high interest.
I just may be possible for you to fix up your credit up enough in a year to get a traditional mortgage loan from a bank, provided your employment history is rock solid and you can show proof of this. If not one year, then it’s definitely possible to fix up your credit enough in two years to qualify.
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