One of the few things that generally holds true about buying a house is that you have to have good credit. It doesn’t need to be perfect, but lenders always want a borrower with a good credit score. Unfortunately, it’s very easy to hurt your credit score due to issues beyond your control. If you find yourself with a score in the low five hundreds – or lower – you may feel like you’ll never buy a home. Fortunately, it is possible to figure out how to buy a house with bad credit.
Learning how to buy a house with bad credit
Life isn’t over just because you are having difficulty qualifying for a mortgage. If you have the ability to make monthly payments and a can prove that you have an income, there’s a good chance that you can find someone willing to lend you money. Unfortunately, it won’t be as easy as doing a standard mortgage search. While some of the funding methods you find might be through major lenders, others might require that you go off the beaten path. Below are a few ways showing you how to buy a house with bad credit.
Start with FHA
One of the best programs out there for homeowners with bad credit is run through the FHA. FHA home loans for bad credit can technically be given out to homeowners who have credit scores in the mid-to-low five-hundreds, and they don’t even require much of a down payment. While there are always strings attached to these loans, they’re a great way to get yourself into a house if your credit is not great. Not everyone qualifies for one of these loans, though, so you will have to do some work to prove that you have a reasonable debt-to-income ratio and that you can afford the required down payment.
You should be aware that getting an FHA loan is always contingent on an approved inspection of your potential home. For the most part, fixer-uppers need not apply – if your potential home has a lot of exterior damage or a few specific problems, it’s possible that you will not be able to get your loan even if you otherwise qualify. FHA loans do tend to take some time to process as well, and not every lender is willing to work with individuals on the lower end of the acceptable scale. As always, shopping around will be a necessity.
Up your down payment
Another good way on how to buy a house with bad credit is to prove that you have enough cash to make a larger down payment. Remember, when you’re taking out a loan what most banks are really looking at isn’t just your credit score, but rather the risk that giving you a loan creates for the bank. If you can prove that you have enough cash on you to make a rather significant down payment, you’ll be able to help the bank deal with some of its reticence to lend to you.
There are, however, some caveats to trying to use a down payment to offset your credit score. You’ll generally have to show that the money that you got for your down payment comes from a regular source, not as a loan. You should also be able to account for any large sums of money that have come into your accounts recently, as the bank doesn’t want to deal with buyers who have liquidated one asset but are otherwise cash-poor. If you aren’t able to show that your ability to make a down payment can impact how much the bank trusts you, it won’t help much.
Get a co-signer
This move is obviously one of the more problematic ways to buy a house with bad credit and can be fraught with peril, but it’s one of the best ways to get a loan at a reasonable rate. If you can find someone with a good credit score to cosign on your loan, you stand a much better chance of not only being approved but of getting a good interest rate. Co-signers are weighed heavily when you go to apply for a loan, and it doesn’t usually matter if the other party is actually going to live in the location with you.
Unfortunately, using a co-signer also puts the other party on the line for your loan. If you miss payments or default on the loan, it will hurt the other party’s credit. If something was to happen to you, the co-signer would also become solely liable for your mortgage. As such, the best way to work with a co-signer is when you know that your credit is going to be in a better state soon and that you’ll be able to put the note in your own name sooner rather than later.
Get a private loan
Yes, private mortgages do still exist. There are small banks and private individuals who will give you a mortgage on a home, and they don’t always adhere to the same lending principles as their bigger compatriots. You may be able to talk to one of these individuals and convince them that your bad credit is a relic of mistakes in the past and that you are now more than able to handle payments. In some cases, you may even be able to pay a lower interest rate by working with a private lender than you would with a major bank, or even find a way to rent to own until your credit improves.
Private lenders are, however, hard to find and even harder to vet. You definitely put yourself at a risk of being scammed when working with these individuals, so always be willing to put in the maximum amount of work to ensure that everything is above board. Even when things do work out well, you never get the same level of assurance that you get when working with a major lender. You should always look for the catch when working with someone who is willing to lend you more than others, as you don’t want to be surprised in the future.
It is possible, if harder, to get a loan if you have bad credit. Check out FHA home loans for bad credit, be willing to put down more money for your down payment, check to see if you can get a co-signer, and be willing to look for unconventional types of funding if necessary. If you have the money and the ability to do your research, there’s a good chance that buying a house won’t be out of your reach for very long. If you’re ready to start your search, our experienced realtors are here to help you figure out how to buy a house with bad credit – and make sure to check out the CENTURY21 Homebuyer Widget to begin your home buying journey today.