How To Buy a Home If You Have a Bad Credit Score
“New mortgages for purchasing homes are churning out at a fast clip, with the borrowers getting those loans having some of the highest credit scores ever,” said CNBC. But what if you don’t have a good score?
“In a perfect world, you’d have a robust credit score and a 20 percent down payment in hand, with mortgage lenders falling all over themselves to get your attention,” said Geoff Williams on US News. “But what if your world is a little dinged? What if your credit score is shabby, your bank manager cringes when he sees you and debt collectors are the ones vying for you attention?”
Well here are a few options that might still allow you to buy a house with bad credit.
Often, first time buyers will look for loans from the Federal Housing Administration (FHA) because their requirements are less rigid – down payments of just 3.5 percent and lower credit scores than what’s required for many conventional loans.
“If you can’t get a conventional mortgage through a mortgage lender, this is the most typical, logical path for a prospective homeowner with bad credit, said US News. “These are loans offered through lenders approved by the FHA, a government agency within the US Department of Housing and Urban Development, or HUD. You can likely get approved for an FHA loan with a credit score of as low as 580, provided you have enough money saved for a 3.5 percent down payment.” Those with credit scores that are even lower than 580 may still qualify for an FHA loan. “According to HUD’s website, your credit score can be as low as 500 - if you can furnish a 10 percent down payment.”
Rent to own
It may not be the traditional route, but rent-to-own programs will help you purchase a house in the future if you’re not quite ready for a traditional mortgage just yet.
“A rent-to-own deal offers prospective buyers an opportunity to settle into a home they want to purchase while they continue to save for a down payment, improve their credit score or wait for a negative factor on their credit report – such as a foreclosure or a collection – to fad into the past,” said Realtor.com. “Rent to own agreements vary in their exact terms but generally the property owners and renters sign a contract in which the renter agrees to rent the property for a specified time, typically one to three years. During that time, the renters usually pay an above-market rent, with the excess rent credited toward a down payment when the contract ends. The contract typically sets a price for the home at the end of the lease.
Hard money loan
A hard money loan is a last resort. Because of the higher interest rate it doesn’t work for many people. A few reasons some buyers might consider a hard money loan include:
-You won’t qualify for a loan because of your credit score or a recent bankruptcy.
-The property or home you are buying does not qualify for an FHA or other conventional loan in that tit needs some renovating.
-You need to get your hands on a large loan without the typical wait.
If you have a little time before you need the loan, a good option is improving your credit. This can take several months and usually longer – depending on how much work you’ll have to do to take care of delinquencies and have errors removed etc.
Even small changes to your score can make a difference.
“Most lenders have carved-in-stone rules about handing out the best terms, and those rules almost always place a major emphasis on your credit score,” said Bankrate. “If their best rates are offered to borrowers with a score of 700 or higher and yours is a 698, those two points could cost you thousands of dollars. According to MyFICO.com, the consumer website of popular scoring model FICO, the interest rate difference between those two scores is about one-third of a percentage point.”
The first step in fixing your credit is knowing what you’re working with.
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