The dream of homeownership is alive and well, as one survey found that 84% of Americans said buying a house, sooner rather than later, is a priority. And maybe you feel the same way, as you’re ready to stop renting. But what if you have bad credit? Will this stop you from buying a house? Not necessarily! Check out these tips on how to get a home loan with bad credit, and then start looking at your home loan options so you can make this the year you achieve your goal of buying a house.
Before you even start worrying about how to get a home loan with bad credit, you should find out what your score is. This means getting a copy of your credit report to get an idea of your credit history. When you view your credit report, you’ll see details that include payment history, the balances on all credit cards, the types of credit accounts you have, and how long you’ve had your accounts.
You can then check your FICO score, which is a number assigned from the three credit bureaus—Experian, Equifax, and TransUnion—based on the details above. Your FICO score will range from 300 to 850—with anything close to 850 being excellent credit! Scores between 720 and 800 are considered very good credit, while scores between 640 and 719 are good. With any of these scores, you shouldn’t have trouble being able to qualify for a mortgage with a monthly payment you can afford.
So, what if your FICO score falls below 640? That’s considered fair credit. You’ll likely still be able to qualify to buy a home, but your interest rates might be higher than average. And finally, any score below 580 is considered bad credit.
But don’t worry. That doesn’t mean you won’t be able to buy a home. You’ll just have to work a little harder than average to find mortgage loan programs that will accept lower credit scores. In addition, you’ll typically have to pay a little more than those with very good credit—whether upfront on your down payment or over the years through a higher interest rate. Either way, it’s definitely possible to figure out how to get a home loan with bad credit.
Work on Improving Your Credit As You Start Looking for a Home
If you’re feeling discouraged because you don’t want to deal with higher interest rates or high down payments, keep in mind that bad credit doesn’t have to last forever! In fact, you can typically improve your FICO score within mere months. So if you’re prepared to put in some work, you could take your FICO score from poor or fair to good or very good—giving you a shot at good interest rates and affordable mortgage payments.
To start, take a close look at your credit report. Do you see any errors on it, such as payments that show up as late—but you have proof you made all the payments on time? How about balances on accounts you know you paid off in the past? Or accounts you’ve never even seen before? If something doesn’t look right, correct it as soon as possible by reporting the errors to the credit bureaus. As long as you have proof that the information is incorrect or outdated, you should see an improvement in your credit score within a month or two.
Maybe your credit report is accurate, but your credit card balances are bringing down your FICO score in a big way. If so, start paying down balances, assuming you have the money to do so. If this means you have to cut back on your spending or get a second job, it will be worth it once you see your FICO score jump into the next credit score range.
You can also try contacting your creditors for ways to improve your score. If you owe a lot on an account, for instance, consider negotiating with the creditor so you can pay off the account for less money all at once. This should bring up your score within a few months. And if you have high balances on credit cards and can’t pay them down much right now, you can ask for a credit limit increase to bring down your credit utilization rate. The closer that rate is to 30%, the better your FICO score will be, so this could be helpful for sure.
Another way to figure out how to get a home loan with bad credit is to know all your loan options. After all, some types of loans require good—or at least fair—credit, while others allow lower scores. You’ll want to talk to a mortgage lender about your loan options if you’re looking for a loan with bad credit.
For example, conventional loans require a FICO score of 620 or higher, so you might want to avoid this type of loan if you have bad credit. On the other hand, you can get an FHA loan—which is backed by the Federal Housing Administration—with a score as low as 580. In some cases, you can even qualify for this home loan with a score between 500 and 579, though this usually requires a 10% down payment. That may be more than the 3.5% down payment you can pay for an FHA loan when you have a FICO score of 580 or higher—but it’s still much lower than the standard 20% down payment!
Another option is a USDA loan. Backed by the U.S. Department of Agriculture, USDA loans are considered good for the typical first-time home buyer who is trying to buy a home anywhere other than a big city. So if you’re okay with living in a more rural area, you may be eligible for this home loan. Generally, your credit score should be 640 or higher, but some mortgage lenders make exceptions for scores closer to 580.
Finally, there’s the VA loan. This is backed by the Department of Veterans Affairs and is available to home buyers who have served in the armed forces. This department hasn’t set a minimum credit score for this loan, but mortgage lenders are allowed to set their own—and it’s typically either 580 or 620. But unlike most home loans, there’s no minimum down payment for a VA loan, making this ideal if you’re a veteran whose credit score is fair or poor and who doesn’t have cash to pay upfront for a house.
As you can see, it’s possible to figure out how to get a home loan with bad credit. It just might take some time finding the right home loan program for you. But if you’re set on getting a conventional loan, note that your odds of approval will be much higher if you have a down payment that’s more than the typical 20%–such as 30% or more.
And no matter what loan you end up with, you’ll likely pay a higher interest rate than you would if your credit score was 620 or higher. Fortunately, you can always refinance a few years after you close on a house to get a lower interest rate as your credit improves!
Now that you know how to get a home loan with bad credit, it’s time to talk to a mortgage lender to apply for the loan that’s right for you. At Lemonbrew Lending, we can help you finance a home or refinance your current loan. And once you qualify for the loan, Lemonbrew Abstract can provide the title and escrow services you’ll need before closing day. So contact us today to get started!