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Guide to Buying a House with a Bad Credit

In conventional mortgages, borrowers will need to have a good credit score to quality or get approved of lower interest rates. This puts off many first-time buyers with low or bad credit, thinking there is no way they could avail of their first house. Luckily, there are strategies and other mortgage options out there that work with bad credit.

It’s not impossible to get qualified for a loan or live in your first house even if you have a low credit score. The catch is, you’ll need to work harder to get your mortgage. Learn some practical tips on how you can get the house of your dream even with a poor score and shaky finances.

  1. Check your credit report

The first thing you need to do is to check your current credit standing. You can request your official credit report from AnnualCreditReport.com. The report will provide you with different metrics from the three major credit bureaus – Experian, Equifax, and TransUnion. The scores you’ll get will be different but will likely be in the same range. You can review the general categories under credit health to get a better idea of your standing. You are more likely to get the best interest rates if you have a credit score of 740 to 850. On the other hand, you’ll find it hard to qualify for one if you have a score lower than 669.

  1. Talk to a credit counselor

Speaking to a reliable credit counselor is a smart move if you’re having a hard time raising your credit score or paying off other debts. These financial experts can help you better manage your income and arrange more convenient payment schedules. Bear in mind though that raise your credit score isn’t something that can be done overnight. It takes at least two to four years even with the help of a credit counseling company. Nonetheless, this can improve your chances of getting approved for a mortgage.

  1. Save up for a bigger down payment

If you want to look less risky to mortgage companies, saving up for a larger down payment can improve your chances. In case your income over qualifies you for other bad credit mortgage programs, don’t hesitate to find alternatives. Some might require you to have at least a 36% debt-to-income ratio and a 25% down payment. If you’re lucky, this can allow you to have a lower long-term interest expense and smaller monthly mortgage payment. You don’t necessarily need to aim for a 25% down payment. Anything higher than the average 3% will be great.

  1. Consider applying for an FHA loan

It’s important to understand that having poor credit will likely qualify you from mortgages with higher interest rates. With that in mind, it’s still vital to shop around for home loan options, terms, and rates. One option to consider is an FHA loan, which is insured by the Federal Housing Administration. On average, this type of loan will only require borrowers to have at least a credit score of 580 with a down payment of around 3%.

It’s best to work with a mortgage company or professional to match you with the right home loan or lender. Some lenders have higher credit score requirements than others so seeking the help of experts can make the process easier and faster.

  1. Prepare for a higher interest rate

Perhaps it’s now clear that possessing bad credit will typically lead you to mortgages with higher interest rates. That’s exactly why it’s best to prepare for it. Instead of the average annual rate of 3%, you might get an offer of as high as 5%. That might sound not a big difference at first, but that’s huge considering your loan will last for about 15 to 30 years. This is a way for lenders to protect themselves from credit-challenged individuals since they already know you have a history of missing or late payments.

So, if you cannot wait until your credit score improves, you’ll need to make peace with a higher interest rate. That doesn’t mean you get locked up on that for life though. Work on improving your credit score then you can try refinancing.

Your credit might be bad but that doesn’t mean you can get your first house, or you can improve it even with a low income. If you’re interested in continuously improving your credit standing, you can consider seeking the guidance of a financial expert. They cannot only help you in getting your dream house but all your other financial goals, too.