How to Buy a Home With Bad Credit: A Complete Guide
Purchasing your first home is a major milestone. But having less-than-perfect credit can seem like a roadblock to achieving your dreams of homeownership. While challenging, buying a house with bad credit is possible with the right preparation and guidance. Follow this comprehensive guide to learn how.
Understand Your Starting Point
When buying a home, the first step is getting a clear picture of where your credit currently stands. Order a free copy of your credit report from AnnualCreditReport.com and review it for any errors. Dispute any inaccurate information, as mistakes can significantly drag down your score.
You’ll also want to find out your specific mortgage credit score, which works differently than typical credit scores. Scores range from 300 to 850, and having a sense of yours early lets you set realistic expectations. Even very low scores around 500 may still qualify you for specialized mortgage programs.
Go through pre-approval to get your mortgage credit score and customized guidance based on your full financial profile. Don’t wait until right before making an offer to have your credit examined. Give yourself ample time to make improvements.
Improve Your Credit Over Time
With a low credit score, your goal is to incrementally build better credit leading up to your home purchase. Even minor positive changes can yield big results.
Something as simple as paying all your bills on time can start increasing your score within 30 days. Request higher limits on credit cards to raise your overall available credit, so long as you use responsibly.
You can quickly build a positive payment history using credit builder tools and services. They act on your behalf to pay routine bills, then report payments to credit bureaus. Authorized user status, where you piggyback on a family member’s credit, is another shortcut.
Avoid taking on new loans or credit cards in the months leading up to your home purchase, as too many hard inquiries can drag your score down. Give yourself time for your efforts to be reflected.
Explore Specialized Loan Programs
Certain government-backed loans offer more flexibility for buyers with impaired credit. FHA loans only require a 500 minimum FICO score, while VA and USDA loans can work for borrowers with scores as low as 580. These programs also offer low or no down payment options.
Down payment assistance programs sponsored by governments and non-profits provide grants, second mortgages, and other aid if you don’t have much in savings. Explore options like these to make buying more accessible.
Conventional loans can also work with less-than-perfect credit, depending on the lender and your complete financial picture. Shop multiple lenders to find one willing to approve your application.
Lean on a Co-Signer
If your credit score falls short of qualifying range, a co-signer with better credit can improve your chances. Their positive credit history supplements yours when applying, boosting your overall outlook. Just ensure any co-signers recognize they also become responsible for repaying the mortgage.
Act Early When Mortgage Shopping
Time is on your side when mortgage shopping with bad credit. Get pre-approved well before you plan to buy so you understand all available loan programs and have time to boost your credit score.
Having a pre-approval letter in hand also strengthens your offer in the seller’s eyes. It shows you are qualified and ready to move quickly. Don’t wait until the last minute to start the application process.
Compare multiple lenders to find one that will work with your credit situation, rather than just seeking the lowest rate. Approval should be your first priority, then focus on overall cost. Mortgage brokers can help match you with more flexible lending partners.
The Bottom Line
Purchasing a home when you have bad credit takes effort, perseverance, and an organized approach. But the sense of accomplishment that comes with those front door keys makes it all worthwhile. Don’t let credit be a dealbreaker on your dreams.
With realistic expectations, utilizing the right loan programs, and diligently building better credit, you can become a homeowner despite less-than-ideal scores. It starts with checking your credit and mortgage options. Now is the time to take that important first step.
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