Purchasing a home with negative credit — or, more precisely, a low credit score — is difficult but not impossible.
A down payment, a strong history of paying your payments for at least the previous year or two, and a consistent salary are all requirements for buying a property through the conventional method. You must also have a credit score that meets the lender’s minimum standards. While higher credit ratings result in more favorable loan terms, low credit can still be used to purchase a property.
In this article, we’ll go through how to buy a home with bad credit.
What Counts as a Bad Credit Score?
When your payment history falls short or the credit score of your lender’s minimum requirements, you have bad credit. Some mortgage lenders want a credit score of 500 in a range of 300 to 850, while others require a score of 580 or 620 or higher.
Some lenders such as mortgage lenders and hard money lenders don’t always care about your credit score, different lenders have different minimum credit ratings. What they truly want to know is if you’ll be able to pay them back each month.
For a mortgage lender, credit scores are just one of several factors to consider. Lenders are also concerned with your job security, annual income, the home you’re purchasing, and other factors.
To put it another way, there is no such thing as negative credit in the eyes of a mortgage lender. There is just qualifying credit, which is the credit score that must be met in order for a mortgage application to be approved.
How To Buy A House With Bad Credit?
Let’s take a look at some of the available loan alternatives and the average credit score criteria for each.
To qualify for a conventional loan, there is no defined minimum income, credit score, or down payment. However, a credit score of 620 or higher is normally required to qualify for a traditional mortgage loan.
However, there are several exceptions. Even if your credit score is below 620, you may be able to qualify for a traditional loan if you have a high income compared to your loan amount or a bigger than required down payment.
Hard money loan
A hard money loan is a short-term, unconventional that is provided by individuals or private organizations who accept assets as collateral rather than traditional lenders. Borrowers may turn to hard money loans after being declined for a loan or mortgage, or to circumvent the lengthy process of acquiring a loan through standard channels.
Buyers can qualify for a hard money loan with a bad credit score. In fact, a minimum credit score may not even be a requirement for qualifying for such a loan. The most important condition for obtaining a hard money loan is to have the required equity in a specific property to utilize as collateral.
For residential properties, the minimum amount is normally between 25% and 30%, while for commercial properties, it is usually between 30% and 40%. While hard money loans are typically short term loans, hard money lenders like 14th Street Capital also give out longer term loans such as rental loans and landlord loans which also includes purchase loans. However, if you are taking a loan to buy a house for yourself, hard money loans interest rates may turn out to be too high since these loans are primarily meant to be for non-owner occupied properties.
Hard money bridge loans can also be taken on a short term basis for furnishing the downpayment of your property till the funding from a conventional source comes through.
Federal Housing Administration Loans (FHA)
FHA loan is one that is backed by the government. Because of the lower qualifying requirements, FHA loans can be particularly appealing to first-time home buyers. An FHA loan requires a minimum credit score of 500.
There are also extra qualification requirements for FHA loans. For example, an FHA loan can only be used to buy a principal house.
Veterans Administration Loans
You may be eligible for a VA loan if you are a veteran or actively serving in the military.
The Department of Veterans Affairs backs a VA loan, which allows you to buy a home with no money down. You may be required to pay a one-time “funding charge” by some lenders.
To qualify for an FHA loan, your home must meet certain criteria. While the VA does not have a minimum credit score. It also depends on the lenders on the requirement of minimum credit score .
A USDA loan is a government-backed loan backed by the United States Department of Agriculture. With a USDA loan, you can buy a home in a qualifying rural region with no money down.
The USDA home loan program provides mortgages to low-income inhabitants of rural areas who would otherwise be unable to acquire a conventional loan. If you live in a rural location and are unable to obtain a conventional loan, you may be eligible for a USDA guaranteed or direct loan.
A credit score of 640 or above is required by most lenders, as well as other income restrictions related to USDA loans. You may still be eligible if your score is near to or below that. Consult a lender to learn more about your possibilities.
How to buy a house with bad credit through mortgage
While obtaining a mortgage for a property or refinancing with much less than perfect credit may be more expensive, it may still be preferable to continuing to pay rent. Here are some pointers to assist you secure a mortgage even if you have terrible credit:
Shop around — Each mortgage provider is unique, and some can offer lower rates than others. According to research, obtaining multiple rate estimates can save you thousands of dollars over the course of a 30-year mortgage.
Consider alternatives to banks – Banks aren’t the only lenders in town; credit unions, non-bank and online lenders, and other sorts of lenders also want your business. Allow them to fight for it to see where you can get the greatest deal.
Investigate bad credit home loans – If you’re a first-time homeowner or otherwise eligible for low-income lending programs, you have alternatives to a traditional loan. VA and USDA loans have no down payment requirements and no minimum credit score, so check with your lender to see if you qualify. Freddie Mac HomeOne, Home Possible loan and Fannie Mae HomeReady programs, as well as several first-time home purchaser programs, are also worth investigating.
Find a co-signer — Try asking a family or acquaintance with good credit to co-sign your mortgage if you have a bad credit. This can help raise your application if the co-signer is able and ready to take on the loan.
Check to see whether you qualify for down payment aid — If you’re looking for a mortgage with bad credit, you may be concerned about saving for a down payment or expecting to increase your down payment to compensate for your credit status. There are over 2,500 down payment aid programs available countrywide, so you may be eligible for one.
Make no major financial changes — A new credit card or large purchase will lower your credit score, so try and avoid taking on or or filing for additional debt during the process of mortgage application.
Keep an eye out for ‘guaranteed’ approval loans — If you encounter advertisements guaranteeing “guaranteed” mortgage approval regardless of credit, that’s a red flag. A creditor must evaluate a borrower’s ability to pay back a loan under federal standards, therefore there can’t be a “guaranteed” only if that happens. You might even acquire that assured acceptance on these types of deals, but at a high or inflated fee.
How to improve your credit score ?
Yes, you can buy a home with bad credit, but you can also buy with good credit!
Keep in mind that credit scores are only temporary, and you can improve them by changing your habits. Even minor adjustments can make a big difference.
So, whether you have six weeks, six months, or more to buy a home, you can improve your credit over time.
Here are five easy ways to boost your credit score and save money on your mortgage, as well as two shortcuts.
1. Make sure your credit report is free of errors.
You haven’t seen your mortgage credit history since you’ve never tried to apply for a mortgage, and much more than one-third of credit file contain errors.
Renters who move around a lot, people who pay or defer student loans, and men and women who change their legal names are all at risk of making mistakes.
Errors in credit reporting can lower your score by more than 100 points.
2. Always pay your bills on time.
Making on-time payments to your creditors is another excellent way to improve your credit score. You’ll notice a difference in as little as 30 days.
If you’re short on cash and can’t afford all of your bills in complete each month, make minimum payments. Minimum monthly payments are still payments made on time. Missed payments, on the other hand, are a detriment.
3. Create a credit cushion for yourself.
The second-largest factor in your credit score is the amount of credit you have in your name, and having a lot of it is a good thing!
It’s a concept that defies logic. Lenders want you to have a lot of credit because they understand how unpredictable life can be. When things go wrong, those high credit lines might keep you afloat and make sure to keep paying your mortgage.
Take advantage of the situation. A customer support number can be found on the back of any credit card you own. Make a call and ask for a credit limit increase.
Gains of 50 points or more are possible.
4. Keep your credit cards active (for now)
Adding to your credit limits can help you boost your overall score, while removing credit away from your accounts will lower it.
Refrain from closing the old credit cards you seldom use, as well as the personal charge card for the store you never go to. Those open accounts contribute to your overall score, and every point matters.
5. Stay away from new credit cards and debt.
It’s unavoidable at times. However, make every effort to make the most of the credit you already have. Don’t take out a new credit card, apply for a new auto loan, or take out a new personal credit line. Each of these behaviors will result in a lower total score.
The first shortcut is to become an authorized user.
Because credit agencies enable two or more people to share credit, ask a family member to add you as an authenticated user on their credit accounts. You’ll benefit from more on-time payments when they pay their invoices each month.
Even if you have bad credit, you can still profit from homeownership. Instead, it may simply necessitate more investigation while looking for funding.
With a government-backed loan, such as an FHA loan, you can get a mortgage even if your credit score is 500. While it may be tempting to buy a home as quickly as possible, it is preferable to take your time evaluating available options and interest rates before beginning your loan search.
Also, there’s hard money loan which does not require your credit history to approve the loan, To apply for hard money loan, get in touch with 14th Street Capital, our team is made up of hard money lenders that started out as real estate investors. Having walked in our clients’ shoes, we understand what it takes to succeed in real estate.