Buying a house with bad credit may seem like an impossible task, but the team here at AHRN has some expert tips that’ll make it a much more manageable process. If you’re here asking how to buy a house with bad credit, we’re going to safely assume that your credit score is … sub-prime. That’s not too big of a problem for us, though, because we have a bunch of tips for all you cruddy-credit-score consumers!
If you’re looking for something specific regarding buying a house with bad credit, click the links below to jump right to that section!
- Can You Buy a House With Bad Credit?
- Best Credit To Buy a House
- Where To Start To Buy a House With Bad Credit
- Home Loans for People With Bad Credit
- Bad Credit VA Home Loan Lenders
Can You Buy a House With Bad Credit?
This question is asked & answered at this point. But for those of you who need a little extra reassurance… YES! You actually CAN buy a house with bad credit. Keep in mind: You may end up incurring extra fees or higher rates than people with good or perfect credit. However, buying a house with bad credit is far from impossible. It’s all a matter of knowing where to start and how to advocate for yourself and your needs regardless of how “not perfect” your credit score may be.
Best Credit To Buy a House
If you do want to purchase a house, your best bet is to have a credit score that is AT LEAST 620 to get a conventional home loan. Of course, with your being here right now, you may not have a score that high.
Though you can pretty easily buy a house with bad credit, you may want to consider increasing your credit to buy a house before attempting to get a home loan. This will help you get better rates and terms when it comes to your mortgage. You can raise your credit score through a variety of means, including getting a secured credit card, closely monitoring your credit reports, and requesting a credit limit increase every few months.
Learn more about credit scores, what goes into them, and how you can increase yours to buy a house on our blog How To Increase Your Credit Score To Buy a House.
Where To Start To Buy a House With Bad Credit
If you’re set on buying a house with bad credit instead of waiting and trying to increase your credit score, we totally understand. Knowing where to start is a huge part of the battle of buying a house with bad credit. We’d suggest taking a second look at your location first, calculating (and possibly building) your savings next, researching all your home loan options, and then looking into rent-to-own homes.
A good rule of thumb is to first research the area where you want to live. Knowing where to buy a house with bad credit is just as important as any other step, as your location will have a major impact on your home’s price and, therefore, your loan and rates.
If you have a small area that you love and want to live in, you should consider expanding your search to adjacent cities or neighborhoods to explore different home prices. You may find that the average home price is much cheaper 20 minutes away from the original location you were looking at.
For example, the average home price in the mid-level city of Madison, AL, is $324,800. However, you could expand your search just 15 minutes down the road to the major city of Huntsville, AL, and you’d find that the average home price is much cheaper at just $247,900. That’s a difference of nearly $80,000. The moral of the story here is this: Don’t limit yourself!
As someone with bad credit, your next step may be spending a lot more time building up your savings than someone who’s looking to buy a home with good or perfect credit. Why? Your down payment is going to determine A LOT about your monthly price of owning a home.
If you are able to save up enough money to put down 20% of the home’s price, you can avoid PMI, or Private Mortgage Insurance, entirely, which could cost up to $3,000 extra out of your pocket per year, depending on your final loan amount. When you’re looking at the less-than-perfect interest rates you’re going to be getting thanks to your bad credit score, it’s essential to save money wherever you can. $3,000 a year for the life of the loan (usually about 30 years) REALLY starts to add up.
By holding off on your purchase to save up money for a 20% down payment, you’re setting yourself up to save more in the long run by avoiding that dreaded PMI.
Home Loans for People With Bad Credit
Some people don’t realize that there are a ton of loan options available to them. Some of these are much better for people who are buying a house with bad credit than others. Let’s take a look at the big four.
If you’re a military member or military spouse, there’s no question that you need to take advantage of the VA home loan that’s available to you. There are so so SO many benefits to using a VA home loan over any other type of loan. For example:
- No down payment required.
- Lower-than-average interest rates.
- Lower closing costs.
- No PMI required.
Check out an extensive guide to the VA home loan here: Military Home Loans: A Comprehensive Guide for Active Duty
FHA loans are the most common option for first-time homebuyers who are buying a home with bad credit. These are loans backed by the Federal Housing Administration that have more lenient requirements than a conventional loan.
The minimum credit score is only 500 for an FHA loan, making it much more appealing to people who don’t have a perfect credit score. You’re also allowed to put a down payment as low as 3.5% if you’re unable to save up enough for a 10% or 20% down payment.
Freddie Mac Home Possible® Loan
Freddie Mac is one of the most flexible options for people buying a house with bad credit. Why? This option actually even allows people with NO credit to purchase a home, provided they can make a 5% down payment.
You can use a wide variety of sources for a down payment, and with this option, you can purchase more than just a single-family home if you need something different.
A conventional loan will usually require a credit score of 620 or higher. If you are able to increase your credit score before buying your home, then a conventional loan might be perfect for you.
However, this is also a good option for people who don’t have a very high income, as the conventional loan doesn’t have minimum income requirements. You could also put as little as 3% down on the home, but you’ll have to pay PMI if you do so.
Regardless of the path you take, the end goal is for you to own your home despite your credit score. If that’s true, then you may want to consider a rent-to-own home. We know that you’re ready to jump into ownership, but a little more time spent in the renting field can actually be really beneficial to your homeownership prospects.
Rent-to-own is a unique process that helps a lot of people with low income and bad credit scores more easily transition into ownership. When looking into rent-to-own homes with bad credit, you’ll see how the process can benefit anyone who isn’t in the most perfect position to proceed with outright ownership.
With this arrangement, you’re put in a lease, usually from one to five years. While you’re paying on your lease, you can rebuild your credit and build equity to be put into the home once the lease is over. Plus, the time spent in the lease allows you to really get a feel for the home that you’ll be buying. It’s sort of a test drive for your house!
Bad Credit VA Home Loan Lenders
Once you’ve determined your best path for buying a house with bad credit, your next step will be to find a lender who’s able to work with you and your special credit score to give you the best possible outcome.
Below, we’ve listed some great home loan lenders for people with bad credit and those looking for a VA home loan.
Rocket Mortgage offers a lot of information designed to help people with bad credit get a home. A lot of their loan options require a 580 credit score. They do offer VA home loans.
Carrington offers home loans with a minimum credit score of 500 in some cases. They do offer VA home loans.
Homebridge offers some loans for people with a credit score as low as 550. They do offer VA home loans.
Quicken provides loans with credit scores as low as 580. They do offer VA home loans.
Buying a house with bad credit isn’t so bad – pun intended. After all, credit is only one part of the expansive list of elements that goes into your terms, payments, and other items before and during homeownership. Credit may be important, but money talks! With a good down payment, you can offset a lot of the negative aspects of buying a house with a bad credit score.
Enjoy your homeownership journey!