How to Get a Home in Spite of Bad Credit
You may think you can't buy a home if your credit is poor, but we have some good news: even if your credit score is lurking somewhere in the depths of the Atlantic Ocean, you can still own your dream home—and without a down payment of 20%.
Before thinking about your options, you should start by reviewing your credit score. The score might be low because the report doesn’t show some of your latest payments, it might not reflect growth in financial stability, or even worse, you might be a victim of identity theft.
If your report is inaccurate, you should dispute it with the credit bureaus via online form or written letter. This is essential because it can expose you to more options and boost your credit score.
The market is already tricky enough for folks with unverifiable incomes and poor credit scores. Our intention is to offload some of that burden, so we’ve done all the research and thinking for you. Below, you’ll find some of the best options available on the market.
FHA loans are a breath of fresh air: they require a down payment of only 3.5% and a credit score as low as 580. These reasonable requirements are ideal for people with bad credit, especially first-time home buyers. Keep in mind, though, that most lenders will still prefer a score of around 620.
Veterans who are looking for a mortgage can benefit from VA loans. These loans are heaven-sent, with flexible credit score demands, zero mortgage insurance premiums, no down payment, and 100% financing. (But, the vets will have to part with small payments like title fees.)
Active military members and vets enjoy funding fees or interest rates that can be as low as 2.15%, while members of the National Guard or the Reserves work with 2.4%.
Note that VA-guaranteed loans are normally offered without a private lender origination payment.
USDA Home Loans
U.S. residents can also benefit from a home loan that doesn’t require a down payment: USDA loans.
The only catch? The applicant must have a credit rating of 640.
Naturally, a lender will need you to prove that you’re creditworthy, and this can only be confirmed with a good credit score. You’ll also need higher FICO scores when dealing with home buyer programs like this. The lender needs all this reassurance so that they can accept the risk of investing in you with no down payment.
USDA loans are ideal for people who are buying a house for the first time.
You also have a choice of going with a home seller instead of a mortgage lender. With a home seller, you’ll enjoy specific advantages like faster processing, zero mortgage lender fees, and the possibility of better terms.
First, though, take a few precautionary measures like ensuring that the home belongs to the seller, it meets building code standards, and its value matches the price. For maximum protection, we recommend retaining a real estate lawyer to help you with the contract.
Non-qualified mortgages (non-QM) or portfolio lenders are also available in this market:
- Portfolio lenders have interest rates that start at around 6%, and they accept FICO scores of around 500. Most programs require a down payment of 15% to 20%.
- Non-QM loans are very flexible, so they’re ideal for people who want to restore credit. The downsides are that they’re harder to find, and usually have higher interest rates and loan fees.
Generally, you’ll have better bargaining power when your credit score is above average – however, there’s still hope for you! A service like Annual Credit Report will help you establish where your score stands. Now, all you need is an expert's opinion, and you’ll be well on your way to living in your dream home.