Refinance

How to Buy a House with Bad Credit

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You’re ready to make one of the biggest financial investments of your life, but there’s one problem. You have bad credit. You’re not alone. In fact, 20 percent of Americans have a sub-600 credit score, which is considered bad credit.

The good news is, bad credit doesn’t need to stop you from taking this next big step in your life. If you’re ready to buy a house, here’s how to make it happen.

1. Check Your Credit Report for Errors

Did you know that you could have bad credit because of errors in your credit report? While payment history, length of credit history, diversified credit, and new credit all affect your score, mistakes, or even identify theft, can also be taking a toll on your score.

The best way to get to the bottom of these potential issues is to get your free credit report, which you’re entitled to once every 12 months. The only authorized website is AnnualCreditReport.com, where you can order your report online.

With your report in hand, it’s time to dig in for mistakes, which could include:

  • Incorrect personal information, like wrong address or middle initial
  • Accounts not belonging to you
  • Closed accounts that are still being reported as open
  • Mistaken duplicate accounts
  • Misrepresented payment history
  • Outdated credit or balance information

To fix any mistakes, call both the credit bureau from which you ordered the report as well as the institution that the error is connected with—both are required to address and fix the issue.

Find Out How to Improve Your Credit.

2. Research Lenders Who Work with Borrowers with Bad Credit

If you have bad credit, not all lenders will work with you. Or, if they agree to work with you, they may only offer you higher interest rates. That’s why it’s important to do your research to find lenders who will work with borrowers who have bad credit.

Start by comparing mortgage offers online, looking for the lender that will offer you the best rate based on your credit score. One option to consider is an FHA loan; one in six FHA borrowers had a credit score below 600, thanks to the low credit and down payment requirements. Most private lenders are FHA-approved, so all you have to do is ask whether the lender you like does FHA loans to get started.

3. Make Sure You Have Enough Money Saved

FHA loans require just a 3.5 percent down payment, but other lenders may require a much higher down payment. This is why it’s important to have money saved before you start looking—if you don’t have the down payment money, you can’t move ahead with the home you love.

If you’re struggling to save for your down payment, you can look for payment assistance via grants from the U.S. Department of Homes and Urban Development (HUD). HUD provides funds to each state, who then gives the funds to residents in need. Before you can get any support from a HUD grant, however, you do need to be approved for a mortgage, and you will also need to take a HUD-approved Housing Counseling class.

Another option is a shared equity mortgage to get the money you need up front. This means that the lender and you share ownership of your home. When the home is sold, each party (you and the lender) get your share of the equity, based on each of your individual contributions.

Here are 26 mortgage terms you should know

4. Pre-Qualify for a Loan

Bad credit or not, you need to go through the process of being pre-qualified with your lender of choice. Luckily, this process, which requires you to speak with a lending officer, is quick and free. The point is for you to shed light on your financial situation to get an idea of how much house you can afford, based on the information you share.

5. Make an Offer on a Home

When you’ve found a home that’s within your budget, you can make the offer that you’re interested in buying. Once your offer is accepted, you’ll schedule an inspection to make sure there aren’t any hidden issues, like cracked foundation, that would make it a bad investment.

6. Wait for Your Loan to be Finalized

Once your loan is processed, all that’s left to do is to sign the paperwork. With the final step taken, you’ll get the keys and can officially call yourself a homeowner.

What to Do Next

If you buy a home with bad credit, it’s critical that you keep up on your monthly payments. This will help improve your credit score and ensure that you stay in good standing with your lender. When your credit improves, you can also consider refinancing to get a better mortgage rate.

While the process may seem daunting, there are options for buying a home with bad credit. Find and use the resources that are available to you and you’ll be a homeowner before you know it.

Jessica Thiefels is the CEO of Jessica Thiefels Consulting and has been writing for more than 10 years. She’s written for AARP, Reader’s Digest and Lifehack and regularly contributes to The Financial Diet, Homes.com and more.