How to Buy a House with Bad Credit

You’re ready to make one of the biggest financial investments of your life. That’s possible even if your credit score isn't where you'd like it to be. More than 35% of Americans have a score below 660, and many become homeowners every day.

These five tips could help you realize your dream of owning your own home.

1. Check Your Credit Report For Errors

Some errors in your credit report have the potential to reduce your credit score, making it harder to borrow money when you need to. Fortunately, you can correct the mistakes. 

The first step is to get your free credit report, which you’re entitled to once every week. You'll need to answer some questions first to verify that you're you. Then, you'll be able to view your reports from each of the three credit bureaus: Equifax, Experian, and TransUnion. 

It's best to check all three as they are likely to differ at least a little. Mortgage lenders will look at all three reports when considering your mortgage application. 

Check your reports for anything that seems off, like:

• Incorrect personal information, such as wrong address or middle initial

• Accounts that aren’t yours

• Closed accounts reported as open

• Duplicate accounts

• Misrepresented payment history

• Outdated credit or balance information

Dispute the information with the credit bureau reporting the mistaken information. It’s easy to do this when viewing your credit report online. For some serious errors, it’s also a good idea to dispute it in writing with the financial institution that reported the error. Both the credit bureau and the reporter are required to investigate the issue within a reasonable time of receiving your dispute. If they find the information in your report is incorrect, they must change it. 

If you're trying to buy a home with bad credit standing in your way, you might find it easier to move forward once the errors are cleared from your credit report.

READ MORE: 5 Ways to Improve Your Credit

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2. Compare Offers From Several Mortgage Lenders

If you want to buy a house with bad credit, you'll have to spend some time researching lenders that accept borrowers with low credit scores. Most charge a higher rate to borrowers with lower scores, but that doesn't mean they'll all charge you the same rate.

Mortgages are very competitive. Lenders want your business. Start by comparing mortgage lenders online. You can also look at banks and credit unions in your area. Sometimes, you can get a lower interest rate with a credit union than you can with a traditional bank. 

You might be directed to consider an FHA loan, too. These have a lower down payment and credit score requirements than conventional loans. In fact, you could qualify with a credit score as low as 500 if you make a 10% down payment. You'll need at least a 580 credit score to qualify for the 3.5% down payment. Most private lenders are FHA-approved, so all you have to do to get started is ask whether the lender you like provides FHA loans.

FHA loans aren’t the only option for a lower credit score. Ask what the other options might be.

3. Save Up For The Down Payment

FHA loans require just a 3.5% down payment, but other lenders may require more. Have money saved before you start looking. 

If you’re struggling to save for your down payment, look for down payment assistance via grants from the U.S. Department of Housing and Urban Development (HUD). The department provides funds to each state, which then gives the funds to residents in need. Before you can get a HUD grant, you need to be approved for a mortgage and take a HUD-approved housing counseling class.

Another option is a shared equity mortgage. This means that you and your lender share ownership of your home. When the home is sold, each party gets their share of the equity, based on each contribution.

4. Get Pre-Qualified Or Pre-Approved For A Mortgage

Whether you're trying to buy a home with bad credit or good credit, getting pre-qualified or pre-approved can help you understand how much house you can afford. 

Pre-qualification is easier to get. You tell a mortgage lender about your income and credit standing. They give you an idea of how much you could afford to borrow and the interest rate you'd pay. You can usually get one of these with a quick phone call to the lender or by filling out an online form. However, pre-qualification isn't a guarantee that you’ll get the loan.

Pre-approval is one step closer to the loan. It means the lender has verified your financial situation and believes you’ll qualify for the loan. For some lenders, pre-approval is a firm offer to lend. In any case, you’ll need to complete a formal loan application when you’re ready to get the loan.

A pre-approval letter is usually good for a few months after you receive it. If you buy a home during that time, and nothing in your financial situation has changed, the lender should honor the terms in your pre-approval. 

Getting a pre-approval can also help you stand out more in a competitive buying market compared to borrowers who don't have one. 

To get pre-approved, you usually have to provide proof of income, including tax returns and bank statements.

5. Find Your Home And Continue To Improve Your Credit

Now it's time to get serious about finding the home you want. Submit an offer and, if it's approved, go back to your lender to complete the mortgage approval process. But don't stop there.

Focus on making all your loan payments on time. Automate your payments if possible so you don't forget to make them. Over time, on-time payments could help boost your credit score, which may open the door to better loan terms down the road. Once you've improved your credit score, you can consider refinancing to get a lower monthly payment or pay less in interest overall. 

If you've done the steps above and you haven't had any luck trying to buy a house with bad credit, focus on improving your credit score. The best ways to start are to pay down any credit card debt and pay all of your bills on time every month. 

Then, once you've gotten your credit score up, you can reach out to mortgage lenders to try again.