Buying a house with bad credit is possible, but chances are it’s going to take a significant effort to get a deal done sooner rather than later. Before we dive deep into credit scores it’s critical to understand that while credit scores are a major piece of the loan puzzle, there are many others such as current employment status and salary that are also factored into the equation.
In fact, it’s possible to obtain a home loan with a credit score of about 650, which is right around the magic number (give or take) most lenders today will consider in addition to the other factors already mentioned. Let’s also keep in mind that all lenders have different lending policies and guidelines. Sure, those policies and guidelines have been tightened thanks in large part to the mortgage meltdown from a few years back, as well as the economic recession, but, generally speaking, you’re never going to know if you qualify (or don’t) unless you make the effort to speak with someone and apply for a loan.
Is your credit score south of 650?
Then the first step is to understand your current credit score and all the reasons it is considered “bad.” Are there inaccuracies? Are “closed” credit lines still “open?” Does a line item appear like it doesn’t belong to you? You’d be surprised how many credit scores are calculated with incorrect, outdated or straight up misinformation. Pull your credit report/score — it’s free — and go through it with a fine-toothed comb, disputing any inaccuracies you uncover. This is actually something you can do on your own; however, many people enlists the services of a “credit specialist” to help them maximize their scores.
If your credit score is still below average, a good alternative is to apply for U.S. Federal Housing Administration (FHA) loan insurance. The FHA helps aspiring homeowners qualify for loans by assuming the risk if the borrower (that’s you!) defaults. FHA loans typically require low down payments and offer competitive interest rates, even for folks who have experienced foreclosures, short sales or other major hardships in their pasts. If your credit score is still bad, and the FHA option isn’t, well, an option, finding an individual to “co-sign” the loan is also a possibility, provided that person is willing to share the financial consequences should you default on the loan. It’s far from ideal, but if time is not on your side and you need a home now — and can afford it — it’s certainly worth a shot if you have someone willing to help.
But, above all else, fixing your bad credit should be your priority before you even start seriously pursuing homeownership. If you can get your credit score in good shape, the rest of the pieces of the puzzle will eventual fall into place.
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