How To Buy A House When You Have Bad Credit

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Buy A House When With Bad Credit

Many of us dream of buying a house we can call our own, but it’s a huge expense. It’s probably the most expensive thing you will ever buy in your lifetime. That means you won’t be able to just use your credit card or your checking account to cover the entire cost. Fortunately, you don’t have to pay for a house in full upfront. You just need to pay the down payment, and then you can arrange for a mortgage.

The problem is that mortgage lenders aren’t all that enthusiastic about lending money to people with bad credit. Mortgage lenders are also business people, and it doesn’t seem sensible to them to lend money to people who have a proven history of not being able to pay for their loans. So if you have bad credit, it can be much more difficult to get that house you’re dreaming about.

But it isn’t impossible. If you have bad credit now, it’s still possible for you to buy the house you want. Here are some tips that can help.

Check Your Credit Score

There’s no easy and quick fix that can transform your poor credit score into an excellent one. But there are some steps you can take that can help even just a little bit, and each little bit helps.

You can start by obtaining a free copy of your credit report. You can get this once a year from each of the 3 major credit reporting companies (Equifax, Experian, and TransUnion). Check these reports out, and see if there are any errors that may be unfairly dragging your score down. If you find any, have it corrected by filing a dispute.

Your credit report may have black marks such as missed payments, but you can discuss these subjects with your creditors. Maybe you can negotiate so that you can pay off what you owe and in return the negative info can be deleted from your record. Not all of your credits will agree to this arrangement, but you don’t lose anything by asking.

Pay Your Bills on Time

After that, make a solemn vow that you will pay all your bills on time. That’s what your credit score ultimately reflects, and that’s what will make your future mortgage lenders less leery about lending you a large sum of money to buy a home. You should aim to make the next 12 months free of any late payments on your part.

Lower Your Debt to Income Ratio

It’s common to have some debt in modern life. But it’s better if you don’t have too much of it in relation to your income. The ideal ratio is that your total debt payments per month don’t exceed 40% of what you earn per month. This includes factoring in your loan mortgage in the future.

This means you should aim to pay off some of your debts. You can start with your credit card debt, especially with the credit cards with the highest interest rates. Then you can move on with your student loans and your car loan. If you can’t pay off your debt right away, it’s best if you can pay down the balance of your debt instead of just paying the interest each month.

Obviously, this also means avoiding getting into new debt in the meantime. So unless it’s an emergency, you may want to hold off buying a new expensive appliance especially when your current appliances are still in good working condition.

Build Your Cash Reserves

It’s a very sensible idea that you have enough savings to cushion you when your life takes a sudden unexpected turn for the worse. You may end up with a medical condition that your insurance won’t completely cover. Maybe you lose your job. If any of these things happen, an ample savings account can be a lifesaver.

This is such a sensible idea that many mortgage lenders look for it when you apply for a mortgage. So before you do apply for a mortgage loan, you may want a nest egg that’s equivalent to about 6 months of your current income. This will demonstrate your financial maturity, and it will show potential creditors that you’re responsible about your finances.

Pay a Larger Down Payment

You may be ready for a new home, but your credit score is still less than stellar. Some mortgage lenders may be willing to overlook that credit score if you’re able to swing a larger down payment (at least 20% of the price of the home). This is because if you have that much in your savings account, then perhaps you’re not as big a risk as your poor credit score may indicate.

When you have that kind of money, it provides mortgage lenders with the impression that you do indeed have what it takes to handle your finances responsibly. The money counterbalances the negative impression brought on by your low credit score.

In addition, you’re less of a risk to lenders because if you’re willing to pay for a larger down payment, it means you’re risking more of your money into the house. Since you’re taking such a huge risk, it means that you’re much less likely to default in your home. After all, you’ve got thousands of your money at risk and if you miss payments on your montage you can default and lose your down payment.

Find Lenders Who Can Work with Low Credit Scores

While the majority of mortgage lenders tend to be conservative and work only with homebuyers with good credit, other organizations may be forthcoming about working with you even if you have a low credit score. Typically, these loans are backed by the government. You can try out VA loans (Veteran Affairs), SDA loans (for the Socially Disadvantaged Applicant), and FHA loans (insured by the Federal Housing Administration).

You can also try private mortgage as well. This involves a private arrangement with a family member or friend who can loan you the money to buy the home. In some cases, it may even be possible to set up a private mortgage with the home seller.

Of course, the ideal scenario is not to have a bad credit score in the first place. But as you can see, it’s not exactly impossible to buy a home even with bad credit.

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