Ah, the American Dream: owning a middle-class home inside a white picket fence with your spouse, dog, and 2.5 kids. That isn’t everyone’s ultimate dream, but for most of us, owning a home is some part of our vision for our future. With the way our economy has changed in recent decades, though, homeownership isn’t as easy as it used to be.
Poor credit alone can make a home of your own seem out of reach. Can you buy a house with bad credit? Is it even an option?
Yes, it is! Before you start house-hunting, though, there are some facts and tips you need to know.
Why Credit Matters When Buying a Home
If you’re paying cash for a house, your credit isn’t likely to matter. For the vast majority of us, though, we need a mortgage to buy a home. That’s when your credit comes into play.
When a lender is deciding whether to approve you for a mortgage, there are five main factors they consider. Your credit is one of the most critical factors.
The lender also considers your debt-to-income ratio (your monthly debt payments compared to your monthly income). They look at your down payment amount, your income stability, and your future home’s value too. While all these factors matter, your credit is at the top of the list.
Tips for Buying a House with Bad Credit
There are countless reasons you might have bad credit or limited credit, no matter how financially responsible you are. These tips can help you own a home even with a less-than-stellar credit score.
1. Look for Credit Errors
Some people look up their credit when they’re getting ready to buy a home and are shocked by how low it is. If that’s the case for you, do some digging.
Go through your full credit report. Are there any accounts you didn’t open? Are there any balances that look wildly inaccurate?
If there are any signs of fraud, start the process now to get them off your credit report. When the issues are resolved, your credit should increase. Be prepared, though, because this can take months.
2. Try Quick Credit Fixes
The best way to buy a house with bad credit is to stop having bad credit. That sounds facetious but there’s more truth to it than you think.
Look for fast ways to improve your credit. Start with that credit report and look for the problems that are hurting your score the most.
If you have high credit card debt, for instance, your problem is a high credit usage ratio. The lower your balance is compared to your credit limit, the better.
If you can’t pay down the balance, consider applying for a credit limit increase, a new credit card, or a line of credit. A higher total credit limit gives you a lower credit usage ratio, even if your total balance doesn’t change.
3. Change Your Debt-to-Income Ratio
As we mentioned above, one of the factors a mortgage lender considers is your debt-to-income ratio or DTI. To improve that ratio, you want either less debt or more income.
One option, if you have the means to do it, is to pay down your overall debts. Ideally, you want to lower your credit card debt.
This serves two purposes. First, with credit cards, your monthly payments will go down when your balance does. This isn’t the case for debts that have fixed monthly payments like student loans, so credit card payments make more of an impact on your DTI.
Second, paying down your credit cards will lower your credit usage at the same time, because it’s revolving credit. That means you’re improving your credit and your DTI at the same time.
4. Be Thorough in Your Paperwork
Your income plays a large role in your mortgage qualification. No lender wants to loan money to someone who can’t afford to pay it back.
As you pull together your paperwork, be as thorough as possible with your income. Don’t forget income from child support payments, alimony, “side gigs,” and other sources.
The more income you can report, the better your DTI will be. This can help your lender look past a less desirable credit score.
5. Check Out Federally Insured Options
The US government wants to increase homeownership rates, and they’re offering a helping hand through specific programs.
One option to try is a Federal Housing Administration (FHA) loan. This program is meant for low-credit homebuyers. You still get a loan from a traditional mortgage lender, but the FHA insures the loan so you’re less of a risk for the lender.
If you’re buying a home in a rural area, you might also have the option of a US Department of Agriculture (USDA) loan. This program is meant to boost the housing market in rural areas and it’s available for low-income buyers.
You might also have state or local programs available to you. Ask your real estate agent if they can counsel you on your options or if they can refer you to someone who can.
6. Fill in the Gaps
You might find that you’re approved for a mortgage loan, but you aren’t approved for a high enough loan to buy the house you want. Have no fear, because that mortgage isn’t your only option.
Close the gap by getting an additional loan or, better yet, a line of credit. A line of credit is especially helpful because you can reuse any amount you pay off. You’ll want to have that available for unexpected homeownership expenses like repairs, furniture, and moving costs.
7. Phone a Friend
If your credit isn’t strong enough to qualify for a mortgage, why not rely on good old teamwork? Your lender may approve you if you have a co-signer: a friend or family member with good credit who is willing to sign on.
This means that if you fail to pay your mortgage, the lender can collect the money from the co-signer. While you never want to betray that trust your co-signer places in you, it gives the lender more assurance. They now have a more reliable person they can collect from, so they’re more likely to approve your loan.
Can You Buy a House with Bad Credit? Yes…If You Know How
You may have heard that it’s impossible to buy a home with bad credit. In reality, can you buy a house with bad credit? Yes, you can, if you know the tips and strategies that can make your dream a reality.
To make your home-buying process easier with a line of credit, apply for a line of credit today.
Click here to read more blog posts.