The Dos And Don'ts Of Buying A Home With Bad Credit

Tuesday Sep 19th, 2017


While it is commonplace for consumers to think you can’t buy a home with bad credit. That is not an altogether true statement.


You may need to provide a written explanation in regards to your credit issues, have a higher down payment requirement, a slightly higher interest rate, or jump through a few more hoops in general,  but you CAN buy a home.


If you are willing to do the work you can  realize your dream of homeownership and start building wealth for yourself and your family.


Here are the DOS and DON’TS of buying a home with bad credit.


DO Get Preapproved


Most realtors or even lenders will tell you to start with checking your credit. I suggest starting with obtaining a preapproval from a mortgage broker or lender who is willing to work with less than perfect credit.




Because in order to provide you with a pre-approval the broker or lender will need to check your credit. A mortgage broker or lender is better equipped to tell you what issues need to be addressed in order for you to qualify for a mortgage.


DO Maintain A Low Debt To Income Ratio


Debt to income ratio is the amount of your debt obligation compared to your income. If you do not have a car payment, lots of student loans or credit card debt that’s a plus.


Lenders only require a minimum of 3 trade lines active for at least 6months, preferably

at least 1 credit line will be an installment loan. (You do not need a lot of credit lines, as more credit lines equal more debt, and the more debt you have decreases your buying power.)


Lenders understand that sometimes unforeseen life circumstances happen- loss of income, or medical reasons may have led to poor credit.


Having 12 months of on time payment history shows you are moving in a positive direction to reestablish your credit history even if your score hasn’t quite rebounded.


DO Save For A Down Payment


While some buyers may certainly qualify for down payment assistance, having your own down payment shows lenders that you are serious and ready to take on the responsibility of home ownership.


Having a larger down payment can be even more of a plus, as it reduces what lenders call the loan to value. Which means you have more equity in the home which in turn decreases the risk to a mortgage lender.


DON’T Get Discouraged


Don’t get discouraged by the thought of a slightly higher interest rate. Since mortgages are amortized over such a long period of time the difference may not be such a large amount at all. For instance a 0.50% increase in interest rate on $200,000 equals an increase of about $55 per month to your mortgage payment.


Aside from the fact that this extra money per month is probably less than the amount of a yearly or biyearly rental increase, once you develop a good mortgage payment history you may be eligible to refinance to a lower interest rate and payment.


There are lenders that will allow you to buy a home with a score as low as 550. If you visit your local bank or direct mortgage lender and they tell you that you need a higher score or better credit, consider contacting a mortgage broker, Brokers generally work with several different lenders, and therefore have more loan products available than a direct lender. Brokers are usually more experienced in working with credit challenged borrowers.



Bottom Line


While it may not be easy it is definitely possible to buy a home with bad credit. So if having your own home is a goal you’ve included on your vision board. Don’t let bad credit stop you from living your dream.




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