How to Buy A House With Bad Credit
Your credit score is a huge factor when you set out to buy a house. That three-digit number can hold a significant influence on the types of mortgages available to you, the down payment you make, and even your preapproval limit. But can someone with bad credit buy a home?
Yes, absolutely! You can buy a house with bad credit. Even first-time home buyers with bad credit can buy a home they love.
Unfortunately, there’s a ton of confusion surrounding real estate. And when it comes to credit scores, much of the frustration—and many of the challenges—come from two different sources:
Credit scores can be impacted by a variety of factors. It’s not just how timely you are with your credit card bills that determines your credit score. Your score is also influenced by your credit history, your credit mix, your debts, and even the age of your credit accounts. Without a proper understanding of what influences your credit, you could negatively impact your credit score without realizing it.
Education. The real estate industry consistently promotes the importance of good credit scores, and that’s for good reason: Lenders prefer working with individuals who have strong credit scores because it’s an indicator that they’re more likely to earn their money back. But that doesn’t mean you’ll never be a homeowner just because you’re credit score is low!
Today, we’re paying special attention to that education component so you’re better aware of the options available to you.
Strategies for Buying A House With Bad Credit
Before we start, let’s define what “bad credit” really is. Although credit scores can range anywhere from 300-850, a bad credit score when buying a home is really just any score that falls below a lender’s standards for a specific mortgage product you’re interested in.
That’s it.
So, even if you have a credit score lower than you’d like or one that’s lower than your one friend who’s really good with personal finance, your credit score might actually be relatively healthy!
Where you may start to run into trouble is when your credit score dips below 620 or 600. At that point, some of your loan options may become limited, and you’ll have to work closely with your lender to find the best product for you.
With that in mind, here are a few strategies for getting into a home you love—even with bad credit:
Improve Your Credit Score
Your credit score isn’t frozen in place, and that means you can change it. In fact, you can relatively quickly improve your credit score to make you a more attractive borrower. A few strategies you use:
Look for errors on your credit report. About a third of all credit reports have mistakes on them. Two groups who are likely to have inaccurate credit information are renters who move frequently and married individuals who never formally changed their name. Of course, there are other innocent scenarios that can negatively impact your credit score, and addressing them head-on can boost your score.
Pay your bills on time. If you have a history of paying your bills late, now’s your chance to change that. By setting up autopay or setting a calendar reminder to pay your bills each month, you can establish a better reputation as a borrower.
Reconcile with collections. If you have any outstanding debts, you may very well have a collections agency hounding you for payment. Communicating with these companies and working to clear your debts can assist in boosting your credit score.
Explore Mortgage Products for Individuals With Bad Credit
Some home loan products were specifically created for individuals with bad credit or limited cash reserves. Others were developed without any credit requirements, leaving lenders to develop their own rules.
Here are a few products that could work for you if you have bad credit:
1. FHA Loans: Backed by the Federal Housing Administration (FHA), FHA loans were first offered during the Great Depression to help individuals buy homes. They’re specifically designed with relatively low down payments and even lower credit scores.
Down Payment Requirement: 3.5%
Credit Score Requirement: 580+
Mortgage Insurance Required: Yes
2. VA Home Loans: Designed for individuals who have served in the armed forces in some capacity, VA loans don’t actually have a credit score limit. And although a lender is more likely to work with you if you have a healthy credit score, the VA doesn’t have any formal eligibility requirements.
Who Qualifies: Active-Duty Service Members, Veterans, Surviving Spouses of Veterans, Members of the National Guard, Reservists
Down Payment Requirement: None
Credit Score Requirement: No specific requirements
Mortgage Insurance Required: No
3. USDA Home Loans: Like VA loans, USDA loans don’t have formal credit score requirements. Two items worth noting, however:
A lender is more likely to work with you if you have a good credit score.
USDA loans are reserved for eligible rural areas, meaning they won’t be available for homes in Pittsburgh neighborhoods like Point Breeze or Lawrenceville.
Down Payment Requirement: None
Credit Score Requirement: No specific requirements
Mortgage Insurance Required: Yes
Find More Assistance for Buying A Home With Bad Credit
New Local Realty was founded to assist people who feel like they’re down and out—so that they can enjoy a clear path to homeownership.
In fact, our founder, Theresa Ward, has even written about her own experience with foreclosure and being moved out of a neighborhood she loved.
That one experience has helped shape everything we do at New Local Realty. A perfect example: Rob Moroney, a compassionate New Local Realty real estate agent who rents out a few properties in Pittsburgh, actively works with his rental clients to prepare them for homeownership so they’re not renting well into the future.
If you’re struggling with bad credit, we can help. We have the tools and resources necessary to ensure you enjoy every opportunity available to you. Contact us today!
