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Dec 2016

5 Tips for Buying a House With Poor Credit

Many of us dream of owning our own home. There’s no doubt that homeownership comes with a sense of security, pride, and excitement that makes it an attractive investment for many. The problem? Homeownership is not always easily within reach for us all due to issues with our credit. When looking to purchase a home, our credit score can either help or hinder our journey to homeownership. If you’re someone with poor credit, you may think that homeownership is a far off dream. However, with proper planning and financial discipline, you can make homeownership a reality. To get started, here are five tips for buying a house with poor credit.

1. Understand your credit

First and foremost, take the time to familiarize yourself with credit vocabulary, and how each phrase or term plays a role in your overall credit picture. Being able to interpret your credit will help you in a number of ways, making you more proficient when you start down the path of bettering your credit. For example, you wouldn’t attempt to change a flat tire without first knowing the name and purpose of each part involved in the process. But, it would be wise to familiarize yourself with the car jack, tire, rim, etc. and how they each help you in changing out your tire.

2. Understand how creditworthiness is assessed

In order to improve your credit, it’s important to understand what factors are considered when a lender evaluates your creditworthiness. If you‘re considering buying a home, keep in mind that lenders will look at your overall credit picture when determining your creditworthiness. Your credit picture includes both your credit report and your credit score. Together, this information will help a mortgage lender better understand your credit history, usage, and diligence toward repayment. This information is then used to assess your overall creditworthiness, or more specifically the risk of repayment. For example, a higher score would decrease the risk for the lender, as your score determines the likelihood of successful credit repayment. Similarly, a low credit score would increase the risk for the lender, because your lower score could indicate challenges in managing or repaying credit in the past, and therefore, a potential future financial habit as well.

3. Try to improve your credit

Now that you understand your credit and how it is assessed, take action. Give yourself time to work on your credit, and don’t be discouraged. Some issues may take months to rebuild, but with proper planning you can improve your credit score. Here are a few tips that can help get you on the right path:

  • Consistently monitor your credit for changes

  • Set and maintain a budget

  • Decrease your debts

  • Be sure to pay all bills on time, early if possible

  • Pay above the total amount due

  • For more tips, check out our blog on ways to improve your credit for a mortgage .

4. Save for a larger payment

If your credit score is low, lenders may require a larger down payment. In some cases, even if it’s not necessary, a larger down payment may still be a smart choice. Your ability to pay higher would help boost your creditworthiness despite your low credit score and credit history. From a lender’s perspective, the more you have invested in your home, the less likely you are to default on payments. This in turn lowers the risk you pose to the lender, even if your credit score is less than stellar. The bottom line? Strive for providing 20% of the loan’s price as a down payment to avoid paying mortgage insurance, while you keep closing costs in mind.

5. Consider applying for a government=insured loan

Government-insured loans include, FHA, VA, and USDA loans. Government-insured means that the loan is backed by the federal government, which gives lenders the confidence to extend financing with better rates and terms. FHA loans are those backed by the Federal Housing Administration, and are a great option for borrowers with subprime credit. FHA loans tend to be more lenient than those backed by Fannie Mae and Freddie Mac, making homeownership more accessible and affordable. According to the Department of Housing and Urban Development, the organization that oversees FHA loans, “borrowers may be approved for an FHA loan with a score as low as 580, as long they are able to put down at least 3.5%. Conventional loans, on the other hand, require scores closer to 620 or 640.”

If you’re active duty military, a veteran, reservist, National Guard member, or a surviving spouse, then you could possibly be eligible for a VA loan, which is backed by Veteran’s Affairs. It’s actually quite often the most ideal loan option because of it’s many benefits including no down payment, no private mortgage insurance, and forgiving credit requirements.

The USDA home loan is also another potential option, and is backed by the US Department of Agriculture. It offers those living in smaller communities and rural area the opportunity to own a home at affordable rates. This loan also has a no down payment option, and isn’t limited to farming communities, like some may believe.

Your less than ideal credit history doesn’t have to be a permanent obstacle standing in the way of homeownership. Through adequate research, planning, and financial discipline, you can make your dreams of homeownership a reality. Mortgage bankers can also help guide you onto the right path of better planning and financial discipline to get you where you need to be to qualify for a mortgage. Reach out to one of our mortgage bankers with questions.