Buying a Home With Bad Credit

Nothing quite compares to owning a home of your own. Even if you’ve had financial trouble in the past and you’re finding it difficult to buy a house with bad credit, there are ways to land the home of your dreams. That’s why we put together these tips on buying a home with bad credit. With a little work, you may be surprised to find that you can qualify for a mortgage.

The Challenges of Buying a Home With Bad Credit

When you’re seeking a loan to purchase a home, lenders will look carefully at each aspect of your financial profile. They may request your social security number, copies of recent tax records, bank account and credit card statements — and they’re going to run a credit report on you to get your FICO score. They do so to get a rating on how you rank as an investment risk.

Can you buy a home with bad credit? The answer to that question depends on the details that are uncovered when the loan processors look into your payment history. When your FICO score is lower than 620, you may not be able to qualify for a standard mortgage loan, also known as a “conventional loan”. But if you do qualify for a loan there are a few key lender details to keep in mind:

• The mortgage-based incentives and discounts offered may be limited
• You may be required to take a home buyer coaching or mortgage readiness class
• You’ll likely pay more at closing
• You may have to produce more documentation than those with better FICO scores
• You may not receive the best-available interest rate

Steps to Purchase a Home With a Bad Credit Score

A better strategy for securing a good interest rate may be to work on your credit rating prior to applying for a loan. Doing so can make you more appealing to lenders and the incentives they offer to those with good credit are frequently better.

Put together a multi-month plan to pay down your debt and boost that credit score. You’ll improve your credit utilization ratio — it’s the amount of revolving credit that you’re using divided by the total amount of revolving credit available to you. That can make a big difference. Also, apply for a secured credit card, to build credit history if necessary. During that same time, you’ll also need to start saving money — if you haven’t already — for a down payment and those illusive, hidden closing costs.

Find Out Your Credit Score

Every year, you’re legally allowed one free credit report from each of the three major credit reporting bureaus: Equifax®, Experian®, and TransUnion®. Credit files can be accessed via AnnualCreditReport.com or call toll-free 1-877-322-8228 to order yours.

Other online credit monitoring groups like Credit Karma and credit.com allow you to instantly get up-to-date credit score and FICO data every time you log in. Enrolling is free and it’s a great way to look carefully at your credit profile over time, as you’re in the process of improving your credit score.

Check for Errors on Your Credit Report

After you’ve had a chance to review your reports at each bureau, you may find mistakes or issues in the report. Start by fixing credit report errors by informing the credit bureaus that you feel your report is inaccurate. The bureaus are required by law to investigate issues you bring to their attention — usually within 30 days. If they determine that the dispute is “frivolous” it may be dismissed outright, so disputing can pay off.

If you find errors, you’ll need to provide evidence to back up your claims. Send in copies of billing statements to each bureau that prove your position and mark your calendar to follow-up.

Apply for an FHA Loan

By applying for a Federal Housing Administration (FHA) loan, you’ll be able to take advantage of a lower down payment. Here are some other key reasons why an FHA loan may be a good option for you:

• You’ll only need to produce 3.5 percent of the home’s purchase price for a down payment
• FHA loans specifically help those with lower credit scores to qualify for mortgages– 580 and above
• FHA allows the seller to increase the purchase price — up to 6 percent — to help the buyer fund closing costs
• FHA loans are “assumable” which allows a future buyer to purchase your loan with a potentially-lower interest rate

Be Prepared for a Large Down Payment

Buying a home will require a lot of your time and attention. And it’s going to mean that you’ll need to come to the closing table with a sizable amount of cash — more than you’d typically need for a security deposit on an apartment, anyway.

And with the 6 percent increase that allows you to borrow funds that can be used for closing costs, you may be able to trim down the amount you need to bring to closing. The total amount of the loan will increase by up to 6 percent, but you’ll be able to pay that off over the life of the loan. Doing so can help you reserve more of your savings for the down payment. Your monthly payments will increase as a result.

Consider ID Protection and Credit Monitoring Coverage

While you’re managing your credit score, it may be wise to pick up American Family’s credit monitoring coverage. It can help to flag fraudulent purchases made in your name. Even though you may eventually be able to prove that these charges were made illegally, your credit rating can suffer until the dispute is resolved.

Another important way to protect your credit score is with our ID protection and restoration coverage. You’ll not only have services that protect your personal information, but you’ll get insurance and resources to help you recover from a data breach or if you’re the victim of identity theft. Our specialist will work as quickly and stress-free as possible to help keep your home-buying dreams on track.

How to Rebuild Your Credit Score

When low FICO scores impact your ability to land a mortgage, you still have ways to improve your credit score. With a little determination, focus and financial responsibility, a better FICO rating can be within reach. As you’re working on improving your credit rating, remember to check in with your American Family Insurance agent (Opens in a new tab). As you move closer towards purchasing your home, you’ll find peace of mind with the knowledge that your big investment is well-protected.