How to Buy a Home with Bad Credit, a Guide for First-Time Home Buyers

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Buying a home with bad credit is possible, but it will likely end up costing you extra money in the long run.

contrary to conventional mortgages, which require a good credit score to qualify, loans offered to people with lower credit scores usually have 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 is programs designed to help you get 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 figure out any 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.

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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

Save for one advance payment 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% down payments, it is best to aim for a higher amount.

4. Review your housing budget

Comprehension how much you can reasonably afford will help you manage your housing costs. It’s not just the mortgage you need to worry about – there’s taxes, Insurance, house maintenance costs, and potentially HOA fees.

Remember that there is also closing costs, which you will pay when your house is closed, as well as moving expenses. 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 search for a 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%. (You may be able to qualify with a score between 500 and 579, but you will need at least 10% for a down payment.) However, not all lenders will approve you, as some have score requirements of higher credit.

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 score of 660. 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.

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