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How to Buy a House With Bad Credit

November 17, 2021
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Having a low credit score can impact your ability to buy a house when you plan to use a mortgage to pay for it. It can also prevent you from getting a home loan and the best financing rates.

There are ways to buy a house with bad credit as you work to better your credit score.

How to Improve Your Credit Score

A lending company will likely check your credit score to determine how comfortable they are with lending you money.

The minimum credit score that’s typically required to get a conventional home loan is 620, FICO reports. There are options to buy a house with bad credit and for first-time home buyers.

You’re not alone. Bad credit scores can happen to anyone and for a number of reasons, including:

  • You’re just starting out building your credit.
  • You went through a hardship you’re trying to recover from.
  • You had to open or close credit accounts and it has negatively impacted your score.

Things You Can do to Fix Your Credit Score

In the short-term, there are things you can do to improve a credit score, sometimes instantly or within a couple of months. Taking steps like these can improve your score each month:

  • Pay off as much of your credit balances as possible. You could earn extra cash by selling belongings you no longer need, picking up a part-time job or borrowing cash from a loved one to pay off your balances.
  • Use Experian Boost to potentially increase your score. This tool uses payments for bills like phone and utilities to provide a potential credit score boost.
  • Apply for a credit line interest with your existing accounts. Most credit card companies won’t penalize you with a hard inquiry just for requesting an increase. When you have more credit available to you, that can lower your credit utilization, which can increase your score.
  • Make sure you make at least the minimum payment due, on time, for each of your accounts. Pay off as much as possible when making each payment.

Loan Options for Those with Bad Credit and First-Time Homebuyers

Some types of home loans offer solutions for those who want to buy a house with bad credit or with no money down. These options can also be excellent loan options for those with good credit.

FHA Loans

Federal Housing Administration loans require a minimum credit score of only 500, making them a good option for those with low credit.

Another benefit is that the down payment requirement can be as low as 3.5% of the home purchase price if you have a credit score of 580 or higher. You can find an FHA lender here.

VA Loans

If you or your spouse is a veteran, service member, or eligible military-affiliated borrower, you may qualify for a Department of Veterans Affairs loan.

VA Guaranteed Loans have no minimum credit score requirement and require no down payment, unless it’s required by the lender. There’s also no mortgage insurance requirement.

USDA Loans

If you’re open to living in a rural area, you may be able to get a U.S. Department of Agriculture loan with a low credit score. The USDA doesn’t have a fixed credit requirement and may provide a loan requiring no down payment.

Lenders usually require a score of at least 640 to offer a USDA-guaranteed mortgage. However, you may be able to qualify for a USDA loan with a lower score.

Check Out Other Funding Options

You might consider other ways to fund your home purchase that you might not readily think about.

Local and Federal Loan Programs

A good place to start is with your state and local government homebuyer programs through the U.S. Department of Housing and Urban Development. You can learn about programs in your state that might help you qualify for a loan or cover part of your homebuying costs.

Down Payment Assistance Programs

Also, check out down payment assistance programs from Down Payment Resource. There are state and local programs that may help you make your down payment. Some options include grants, zero-interest loans and low-interest loans.

Gifts From Family Members

You might consider using a gift from a family member to help with a down payment or with paying down credit accounts to improve your score. Lenders look at a variety of factors, not just a credit score, when determining lending decisions. You may be able to get a home loan if you have significant funds for a down payment, for example, or if you’ve just increased your earnings with a new job title.

Home Developer Financing

Also, if you’re considering purchasing a home through a home builder, ask about developer-sponsored financing. The home builder may be willing to help you cover some homebuying costs, such as costs towards a down payment or closing costs. There may be construction loan options for those who are working with a custom homebuilder.

Plan Early & Research Your Options

No matter what your credit score is, there are options that can help you achieve your home ownership dreams. Building or buying a newly built home is achievable today for more people than ever before.

When you’re ready to look for your dream home, check out Brookfield Residential. Contact us to learn about your options.