Buying a home is a big life event that should involve a lot of thought and research. The collapse of the housing market in 2008 is evidence enough that buying a home isn’t a decision that should be rushed. Fortunately, if you have a good credit history it will make the process much easier. But can you get a house with bad credit?
Having poor credit can make many aspects of your life more complicated. It can be difficult to get a good interest rate on a loan, or even to get a loan at all. Read on to learn more about what you can expect when you go to buy a house with bad credit.
Programs to Help Buy a House With Bad Credit
Many different programs exist to help homebuyers with low credit scores or low income. The following resources may help you if you’re considering purchasing a home, but you have less-than-perfect credit:
FHA Loan
An FHA loan is a loan that is insured by the Federal Housing Administration and offered by an FHA-approved lender. FHA loans help borrowers with poor credit. These loans allow borrowers to put down a smaller amount of money upfront, sometimes as little as 3.5% of the home’s value. If you have a low credit score, this is a good option to buy a house.
There are several requirements with FHA loans, including:
- A FICO score of at least 580 for a 3.5% down payment
- A FICO score of at least 500 for a 10% down payment
- A mortgage insurance premium is required
- Your debt-to-income ratio is less than 43%
- The house must be your primary residence
- You must have regular income and employment1
Good Neighbor Next Door
The Good Neighbor Next Door program offers assistance to law enforcement, teachers, firefighters, and emergency medical technicians for purchasing homes. The Department of Housing and Urban Development offers 50% off the list price of certain homes for these individuals. However, the following requirements must be met:
- The home must be your primary residence for at least 36 months.
- You must choose a home within a specific “revitalization area.”
- If more than one person submits for the same home, there will be a random drawing.
- If chosen, you must sign a second mortgage for the discounted amount, however, you won’t pay anything on it if you meet the 36-month requirement.
There may be more programs that will help you purchase a home. Check your state and local resources online by searching for home buying programs in your area.
Buying a House With Bad Credit and No Money Down
Putting money down on a home means that you already own that percentage of the property. Another advantage of a larger down payment is that your monthly payments throughout the mortgage may be lower each month if you put down a significant amount at the start of the loan.
Not offering a down payment may mean you spend less initially, but there are also pitfalls with this option:
- Your monthly mortgage payments will likely be higher
- Your interest rate may be higher
- You may be forced to pay mortgage insurance
If you can’t put down the traditional 20% when buying a home, that’s ok. And if you have a poor credit score, you can still buy a home. Consider exploring an FHA loan so that you can put down less upfront, and still get approved with bad credit.
First-Time Homebuyers
It’s extremely important for first-time homebuyers to explore all of their options. Buying your first home can be a very complicated process with a lot of important details to consider. Make sure you do your homework, explore all of your options, and thoroughly research any lenders you’re considering.
Here are three key tips to remember if you’re considering buying your first home:
- First-time buyers can get assistance through state programs such as tax breaks, and federally backed loans. Search for assistance programs in your area before making your decision.
- Don’t rush into a decision. Make sure to think about how much you can afford, what kind of down payment you want to offer, and what type of neighborhood you want to live in.
- The home-buying process involves five main parts: finding the right home, finding a lender/financing, making an offer, having the home inspected, and closing on the purchase.
If you’re not ready to buy a home, don’t worry. It’s one of the biggest purchases you’ll make as an adult. Spend some more time considering your options and looking for programs that can help you. This will also give you more time to save up for a down payment. Be cautious, do your research on mortgage lenders, and eventually you’ll find the right house and lender for you.
General Questions