CreditNinja is here to help you figure out how to get a house loan with bad credit, and more importantly, whether or not buying a house with bad credit is the right choice for you.
For many people, buying a home is a meaningful and rewarding experience that they’ll never forget. A lot of people see it as a big life step, signifying that you’ve reached adulthood. But despite the social pressure you may feel about “growing up” and buying a house, it’s still something you shouldn’t do unless you’re 100% sure you’re financially prepared.
But is it possible to get a house loan with bad credit? The quick answer is: yes. It’s not easy, and the lower your score, the more difficult it will be. Lower credit scores will also mean much higher interest rates, which may make it difficult to afford your payments.
Getting a Bad Credit Home Loan
If you have a poor credit history, getting any loan may be a challenge. And getting a home loan, or mortgage may be an even bigger challenge.
There’s a very simple reason for this: houses are expensive. Very expensive. And lenders who issue loans to buy houses need to make sure that the customer can repay the loan. When you have bad credit the lender may not trust that you’ll stick to your financial obligations.
The first step in your home-buying process is to check your credit score. Several companies track your borrowing history and give you a score based on how financially trustworthy you are: Experian, TransUnion, and Equifax.
Start by signing up for free accounts on each of their websites, and checking your credit score. Remember that the lower your score is, the lower your chances of being approved for a home loan.
Tips for First-Time Home Buyers
Buying a house for the first time may be a stressful situation. It can be a complicated process with a lot of factors to consider. Here are a few quick tips for first-time homebuyers:
- Check your credit score, and check it often — As we mentioned above, this is the first step for any large purchase that requires a loan. If you don’t know your credit score, you won’t know what types of loans and interest rates you’ll qualify for.
- Improve your credit score — If your credit score is low, you’ll need to work on improving it. Low credit scores mean high-interest rates and less favorable terms. Some of the main things to focus on when boosting your credit score are: paying off debt, making payments on time, and lowering your credit card usage.
- Start a savings account — Having money to use as a down payment on a home may mean lower monthly payments. If you know you’ll want to purchase a home in the next few years, start saving now.
- Look into assistance programs — Several state and local programs throughout the country aim to help first-time home buyers. You may find a program that will help you make a down payment, give you a low-interest mortgage, or give you a no-interest loan to make your down payment or pay your closing costs. Start by searching the internet for “first-time homebuyer programs” in your area.
What Is an FHA House Loan?
FHA stands for the Federal Housing Administration. An FHA loan is a home loan, or mortgage, that the FHA insures, and is issued by an FHA-approved lender. These loans are designed to help first-time homebuyers with moderate to low incomes and credit scores.
If you have a low-to-moderate income, or your credit score is low, it would be wise to look into an FHA loan for buying a home. These loans allow the borrower to make a smaller down payment than what is normally required.
With an FHA loan, and other state or local assistance programs, you may be able to get a great deal for a home loan, even if you have bad credit.
Do Zero-Down House Loans Exist?
One term you may hear throughout your home-buying research is “zero-down mortgage” or “zero-down loan.” This refers to the amount of money you’re offering up as a down payment.
A down payment is simply the amount of money that you pay upfront, to purchase the home. It’s usually expressed as a percentage of the total cost of the home. So a 10% down payment on a $200,000 home would be $20,000.
A larger down payment means you start with a larger stake in the home. Simply put, you own more of it than you would with no down payment or a small down payment.
While it may be easier for you initially to find a zero-down mortgage, it may also mean much higher interest rates and monthly payments. Zero-down mortgages do exist, but they may not be a wise financial choice.
What Is a Guaranteed Approval Mortgage?
A guaranteed-approval mortgage would mean that the lender is guaranteeing that you’ll be approved and given a loan, despite a low credit score. While this may sound appealing, it’s not realistic, and a credible lender probably won’t guarantee approval.
This is a term you might hear whether you’re searching for a mortgage or another type of personal loan. However, a trustworthy lender likely won’t guarantee approval because they would base their decision on several factors.
Lenders will look at your credit score, your borrowing history, your current debts, the state of your bank account, and more. That being said, there’s no way for a credible lender to know whether they can approve you for a loan until you submit your application and all the necessary information.
But if you improve your credit score, start saving up, and do thorough research for home-buying programs, you’ll be in your new house before you know it.
Now that you know how to get a house loan with bad credit, check out more personal finance tips in the CreditNinja Dojo!