The Guide to How Getting a Mortgage With Bad Credit is Possible
Is it possible to get a home loan with bad credit?
Most people think having bad credit makes it more difficult to get a mortgage. But getting approved for the loan isn’t the difficult part. A much worse difficulty is being stuck with a loan you can’t handle.
It’s more accurate to say that bad credit limits your options for a home loan. And the options you’re left with may be less than ideal, or downright disastrous.
While getting a mortgage with bad credit is possible, it’s not always a good idea. So to help you understand the ins and outs of bad credit home loans, we’ve written you this guide. Read on to learn how to get a mortgage with bad credit, and whether or not you should.
How Will Having Bad Credit Affect Your Home Loan Application?
Your credit ranking is a score of how good you are at borrowing money. Basically, it tells lenders how well you can be trusted with any money they lend to you.
In the lenders’ eyes, the lower your score, the worse you are at borrowing, and the riskier it is to lend to you. Lenders don’t want to lend to those who aren’t likely to pay them back.
So many of them won’t approve you for a loan if you have a low credit score. And if they are willing to approve your loan, you’ll be charged a higher interest rate than applicants with better credit.
This higher interest rate means higher monthly payments and a longer loan term. Even if you can afford the payments, it will cost you tens of thousands of dollars more than getting a loan with good credit.
Option 1: Raise Your Credit Score
Truthfully, your best option for getting a bad credit home loan is not getting one. That is, it’s better to work hard at raising your credit score and wait until it’s good enough for a decent interest rate. And by “better” we, of course, mean “thousands of dollars cheaper.”
Bottom line: if you can afford to wait 3 months to a year before buying a home, do so. While you bide your time, here are some simple tips for building up your credit.
Check Your Credit Reports for Errors
Did you know there’s a 25% chance your credit score is incorrect? A study by the Federal Trade Commission found that 1 in 4 of their participants found at least one error on their credit report that could negatively affect their score.
You’re legally entitled to free access to your 3 credit reports (one for each credit bureau) once per year. It will be time consuming and boring, but it’s worth it to read through all three credit reports and check for errors. In rare cases (1 in 250), correcting these credit errors raises the affected credit score by 100 points or more!
Use Your Credit Card Properly
It might sound like a really bad idea to start using your credit card more. But if you can trust yourself to strictly follow these credit building steps, your credit standing can easily go up.
First, take a detailed inventory of your monthly income and expenditures. Know exactly how much you get each month and how much of it goes to rent, groceries, utilities, and any other necessary expenses.
If your income covers these expenses, start paying for them with a credit card. Try to use a card that earns helpful rewards.
As soon as you receive your income, pay off the entire card balance. Don’t wait for the credit card bill; always pay it right away.
This shows the credit bureaus (who determine your credit score) that you are good at borrowing money and paying it back on time. And that raises your score.
However, this can still backfire if you aren’t careful. Never put unnecessary luxuries on this card, only the necessary expenditures you know your income can cover. Otherwise, you’ll rack up debt and worsen your credit.
And pay attention to not go over your limit. This, too, will hurt your credit.
Pay Down Debt
Next, don’t ignore any existing debt you’re already paying. Paying off outstanding debts will greatly increase your credit score.
Work as hard as you can for a few months to live below your means. Give up some luxuries and save up.
For example, brew generic coffee at home instead of buying a $6 Starbucks latte every day. Spend nothing on iTunes for 3 months.
Then, use the money you save to pay down existing debts.
When is It a Good Idea to Get a Bad Credit Home Loan?
If you refuse to wait and work for better credit, at least follow these guidelines to avoid foreclosing. Don’t take the loan if any of these situations apply to you.
- The interest rate sucks
- The monthly payment exceeds 30% of your monthly income
- You’re bad with money
The first two points are a recipe for financial hardship. You’ll either have difficulty paying or you’ll be adding several unnecessary years to this financial burden.
About the third point: if you already have difficulty paying bills, it’s best not to add another.
Option 2: Personal Loans
As long as you keep the above guidelines in mind, you can try for a personal loan. Many lending networks offer personal loans no credit check. If you can get a large enough personal loan, and once the funds deposited and fully available, you can use it as cash for buying a house.
Option 3: FHA Loans
This program by the Federal Housing Administration helps those with moderately bad credit buy a home. If your credit score is 500 or above, you may be eligible for an FHA loan.
However, if your score is under 580, you’ll have to pony up a 10% down payment to qualify. Those with scores above 580 may be approved with only a 3.5% down payment.
Getting a Mortgage With Bad Credit
Getting a mortgage with bad credit is possible. But is it the best option for you? Carefully consider the information in this guide before rushing into this major financial decision.
Need more home buying advice? Read this: Should I Rent Before Buying a Home or Condo?