Feverpitch / Getty Images
Buying a home with bad credit is possible, but it will likely end up costing you extra money in the long run.
Unlike traditional mortgages, which require a good credit rating to qualify, loans offered to people with lower credit scores generally have higher credit scores. mortgage rates. But if home ownership is your goal, it is entirely possible to achieve it with a few concessions.
If you are a first-time home buyer, there are programs designed to help you qualify for a loan. For starters, it helps to understand what you will need to do to buy a home.
How to buy a house with bad credit
1. Get copies of your credit report
Understanding your credit history is essential to understanding what affects your credit score. Your credit report shows details such as your personal information, payment history and whether you have filed for bankruptcy. Getting your credit report can help you understand the discrepancies so you can report errors, pay off debt, and increase your score.
You are entitled to a free credit report from the three major credit bureaus each year. Go to AnnualCreditReport.com to know more.
2. Consult a housing counselor
Speaking with a housing counselor from an HUD-approved agency can help you understand the different parts of the home buying process, such as loan options and how to close a home, and how your credit score is. will be taken into account.
These are usually free or low cost meetings; the goal is to help you understand the nuances of owning a home. You can search on HUD.gov for HUD-approved housing counseling agencies in your state.
3. Start saving for a down payment
Saving for a down payment will show lenders that you are serious about buying a home. Those with bad credit should consider setting aside a larger down payment, as this could help you get a better mortgage rate.
A larger down payment shows the lender that you are more invested in buying a home because you have put in more money. While there are mortgages that take 3.5% down payments, it is best to aim for a higher amount.
4. Review your housing budget
Understanding how much you can realistically afford will help you manage your housing costs. It’s not just the mortgage you need to worry about – there are taxes, insurance, home maintenance fees, and potentially HOA fees if you buy a condo.
Remember that there are also the closing costs, which you will pay when you close your house, as well as the moving costs. If you don’t know how to calculate the estimated costs, ask your housing advisor.
Find out how much you can afford to buy using this calculator from our partners:
5. Apply for an FHA or low credit loan
Unfortunately, with a low credit score, the mortgage you qualify for will likely carry a higher interest rate, which means you’ll end up paying more interest over the life of the loan. Still, shopping around for mortgage rates, options, and terms is a good idea. Talk to your mortgage broker or housing advisor about your options.
Another option is to look for an FHA loan, which comes from a traditional mortgage lender and is insured by the Federal Housing Administration. You may be eligible for an FHA loan with a minimum credit score of 580 and a down payment of 3.5%. However, not all lenders will approve you as some have higher credit score requirements.
Taking out an FHA loan means that you will have to pay mortgage insurance, also known as a mortgage insurance premium, for the duration of your mortgage. Mortgage default insurance benefits the lender because it protects them against the risk that you stop paying off your loan. Currently, the mortgage insurance premium on an FHA loan is 1.75% initially, then 0.7 to 0.85% per year.
You can also review VA loans if you are a veteran – the VA does not set a minimum credit score, but lenders generally prefer borrowers with at least a 620 score. The same is true for USDA loans, which are available to some borrowers in rural and suburban areas, although lenders tend to prefer borrowers with a score of 640 or higher.
6. Work on rebuilding your credit
If you find that you are not eligible for a loan, you will want to take steps to become more creditworthy. Take another look at your credit report to see what is impacting your credit score, then take steps to improve it. Consider lowering your debt ratio by increasing your income, pay off debts, or both.
Consider using credit monitoring tools – there are free tools, some provided by your credit card issuer – so you can track your credit score and determine when it’s time to apply for a home loan.
Related coverage of How to do it all: money
Personal Finance Insider offers tools and calculators to help you make informed decisions with your money. We do not give investment advice or encourage you to buy or sell stocks or other financial products. What you decide to do with your money is up to you. If you act on the basis of any of the recommendations listed in the calculator, we receive a small share of the revenue from our business partners.