Buying a house is a dream many people have, but it can seem out of reach when you have bad credit. While it’s certainly easier to qualify for a mortgage loan with a credit score of at least 620, it’s not impossible if your score is lower. You just have to prove to lenders that you’ll pay your mortgage on time every month for years, and having a good credit score is only one way to do this. If you’re hoping to become a homeowner without first having to spend years improving your score, take a look at some of your options.
Bad Credit? Check Your Credit Report for Errors
Your first step is to get a copy of your credit report. You might be surprised by your score, as it could be higher or lower than you assumed. Be sure to look over the entire credit report, because you might find an error, such as a bill in collections that you actually paid. If you do find an error, report it right away to the creditor so you can get it removed from your credit report before you get a mortgage.
If your score is low and you are getting ready to look at houses, you have a chance of improving your bad credit at least a little in the next few months. Start by making every payment on time, and then pay down any credit cards that have high balances. If you have a late payment on your credit report, try contacting your creditor to see if you can get it removed, as this is a possibility if you’re a loyal customer and are not normally late.
Similarly, if you have collections on your report, ask the creditor if you can pay the amount past due in exchange for the collections being removed from your credit report. In some cases, even boosting your score by as little as 10 or 20 points can make a difference, since it might take your score from poor to fair.
Make a Big Down Payment
If your credit score still falls into the bad or poor category when you’re ready to buy a house, rest assured you can likely still get a mortgage loan. You just might have to pay more upfront. Making a big down payment can help you get a loan, because it reduces the amount of money you need to borrow. This makes it more likely that you’ll be approved.
In addition, if you put down 20 percent or more, you should be able to avoid private mortgage insurance (PMI), as you typically have to pay this monthly if you put down less than 20 percent. And of course, the more money you put down on the house now, the less you’ll end up paying in interest over time. So there are benefits to saving up a good down payment, regardless of what your credit score is.
Look for a Loan That Doesn’t Require Good Credit
Typically, mortgage loans require you to have a credit score of about 620 or more, which is why buying a house when you have a lower score can be challenging. However, it’s not impossible, in part because there are loans that don’t require a score of 620 and up. They don’t require a large down payment, either.
FHA loans are a good example of this type of loan. This loan is backed by the Federal Housing Administration, which makes lenders more willing to offer money to borrowers with bad credit, as the loan will be repaid either way. With an FHA loan, your credit score can be as low as about 580. You just have to have a down payment of 3.5 percent, which is still much lower than the typically recommended 20 percent. This is why FHA loans are usually appealing to homebuyers who have bad credit.
Show Lenders Why You Should Get a Mortgage Loan
Typically, lenders use computer systems with algorithms to determine which homebuyers are eligible for mortgage loans. This is why it’s easier to get a mortgage loan when your credit score is high. However, it’s not all about the algorithm. Many lenders are willing to overlook low credit scores if you have something else to offer as a borrower.
For example, if you have a great rental payment history, let your lender know, since this shows you’re likely to make your mortgage payments on time. And if you have a lot of money in savings, such as enough to pay your bills for about six months, show proof of this to your lender. This suggests that even if you lose your job or suffer other financial setbacks, you’ll still be able to pay your mortgage, and that’s what’s most important to lenders considering letting you borrow money for a house.
As you can see, you definitely have options when it comes to buying a house with bad credit. But if you’re not in a rush to buy right now, it’s a good idea to spend some time and effort improving your credit score. You can even contact a credit repair company for help getting started. After all, the higher your score is, the more options you’ll have when it’s time to buy a house.