The median household income for first-time homebuyers is about $80,000. If you’re in debt and your credit rating is in the red, you might feel like you can’t buy a home.
That’s not true!
Want to buy a home with bad credit? Use these eight tips. With these tips, you can discover your new home without letting your credit weigh you down.
Don’t let the past impact your future. Instead, start searching for your new home! Discover how to buy a home with bad credit using these eight tips today.
1. Pull Your Credit Score
While buying a home with bad credit isn’t easy, it is possible. First, you’ll need to set a realistic mindset. Tell yourself that you might need to take the time to plan and prepare before you really start house hunting.
Whether or not buy can buy a home will depend on:
- Your debts
- The lenders in your area
- How bad your credit is
- Your source of income
First, take the time to pull your credit report. You can use tools such as AnnualCreditReport.com. Some banks track your credit score, too.
For the best interest rates, you’ll need a credit score between 740 and 850.
Now that you’ve pulled your credit score, you can make a plan to boost your credit.
2. Pay Off Debts
Take the time to start paying off any lingering debts you have. Mortgage lenders will look at your debt-to-income ratio. They’ll compare your total monthly debt payments to your total monthly income.
Then, they can determine your mortgage interest rate.
Your debt-to-income ratio tells lenders how much debt you have and how much money you can dedicate to other expenses.
Add up your including:
- Student loans
- Car loans
- Credit card payments
- The future mortgage payment you’re aiming for
Then, divide that number by your typical monthly income. Most mortgage lenders prefer a ratio below 36%.
In the meantime, try paying off your debts. The average American has about $90,460 in debt. Get started on this step right away, since it can take a while.
3. Prepare for Higher Interest Rates
Remember, you want to go into this with realistic expectations. If you have a low credit score, lenders will see you as high-risk. They’ll likely offer you a high-interest rate to mitigate that risk.
If your credit score is low, prepare yourself to pay a high-interest rate.
You might not get locked into that rate for life, though. You might consider refinancing your mortgage later, once you’ve improved your credit score.
If you can’t afford a higher interest rate, that’s okay. Consider housing alternatives, such as renting instead.
4. Determine Your Budget
Before you start falling in love with houses in the area, sit down and set your shopping budget. Determine what you’re comfortable paying for. Otherwise, you could end up falling in love with a house you can’t afford.
Otherwise, you could end up spending more of your income on home expenses and your mortgage instead of saving money.
If you want to buy a home with bad credit, focus on buying below your means. Remember, your interest rate will likely end up higher than expected.
Try to spend no more than 28% of your annual gross income on a mortgage. Don’t forget to consider other home-related expenses when calculating your budget as well.
5. Start Saving
Before applying for a home with bad credit, try to save up as much money as possible. Saving up for a large down payment can help you qualify with lenders. If you put more money down, you can aim for a smaller loan.
Meanwhile, every dollar you save for your down payment is a dollar that won’t accrue interest on your mortgage.
Try to aim for a down payment that’s 20% of your home’s price.
6. Consider an FHA Loan
If you have bad credit and still want to buy a home, look into acquiring a Federal Housing Administration (FHA) loan. These loans are designed for people who struggle to receive conventional loans. They’re usually best for first-time homebuyers.
An FHA loan often requires lower down payments than private lenders require.
Try to get your credit score to at least 580 before you qualify for an FHA loan. If your credit score is at least 580, you could get a loan with a 3.5% minimum down payment.
There are a few downsides to consider before you file for an FHA loan, though. For example, you might need to pay for mortgage insurance premiums.
In order to receive an FHA loan, you’ll need to have a steady employment/self-employment history of two years. You’ll also need to work with an FHA-approved lender.
7. Try Credit-Flexible Loans
Are you a veteran? If so, there are credit-flexible loans specifically available to you.
Consider applying for a VA housing loan. These loans are available to veterans, current service members, and surviving spouses. The benefits of a VA housing loan include:
- Low or no down payment requirements
- Government backing
- Competitive interest rates
However, your required credit score will vary based on the lender.
Are you a lower-income homebuyer who lives in a USDA-eligible rural area? Consider a USDA loan program. The US Department of Agriculture offers mortgage assistance to people living in specific rural errors.
You won’t have to worry about credit score requirements or a down payment. Lenders will look at other components of your financial history, though.
8. Boost Your Credit Score
Before buying a home with bad credit, try to improve your credit score as much as possible.
First, make sure to pay your bills on time. Consider increasing your available credit by paying down balances.
Otherwise, try to stay away from hard credit inquiries. Having too many inquiries on your credit can look bad. Lenders will see it as a sign of desperation.
Meanwhile, hard credit inquiries could further lower your credit score.
How to Buy a Home With Bad Credit: 8 Tips to Affording Home Sweet Home
Want to buy a home with bad credit? Now that you know how to, get started! Remember, you’ll need to start paying off your debts and improving your credit score right away.
With these tips, you can afford the home of your dreams despite your credit history.
Looking for alternative housing options? Consider renting! We can help.
Get approved with no down payment! Apply today to get started.