7 Key Steps for Buying a House with Bad Credit
While we are taught from a young age that money is tangible, we eventually come to realize that things aren’t so simple. For a lot of people and businesses, working debt is one of the best ways to make dreams come true, but for people to be willing to loan you money, you’re going to have to prove that you can pay them back.
Far too many people are under the mistaken impression that their bank statement will be enough to get someone to lend them a significant sum of money. Unfortunately, this is not the case unless your bank account has a large sum of money in it, or unless it is spotless when compared to the lender’s other clients.
A credit score makes things much simpler by allowing a potential lender to see exactly how likely you are to repay your debt, but far too many people are hampered by a poor credit score. If you’re looking to buy a home with bad credit, you’re in the right place. We’ll help you repair your credit, and provide you with seven steps to buy a home with bad credit.
Can You Buy a House with Bad Credit?
If you’re wondering how to buy a house with poor credit, you’re going to have to consider your financial situation before anything else. You have to keep in mind that everyone’s finances are different, and this can put you in a different position than someone else looking into purchasing a house with poor credit.
Keep in mind that money lending is a business, and people won’t be willing to give you a loan out of the kindness of their hearts. Your credit score will allow a lender to determine whether or not you’re likely to make the payment required in the first place, and nobody wants to loan out money that they can’t eventually collect.
As you would imagine, this puts you in a precarious position when you want to buy a house with bad credit, but it doesn’t make it impossible. While it is true that you may have to jump through a few more hoops and that your interest rate may not be ideal, you will still be able to get a house if your credit isn’t downright abysmal.
Just like anything else that’s worth it, you’re going to have to put some hard work into getting your home.
The 7 Steps to Buying a Home with Bad Credit
In this section, we’re going to look at the seven steps to buying a house with poor credit, and we’ll look at them in the order in which you should follow them. Of course, all of these tips may not apply to you, so feel free to skip over some of them.
1 – Check Your Credit Score
The first thing that you’re going to have to do when buying a new home with a low credit score is to check your credit score in the first place. As you may know, there are three credit reporting agencies, all of which supply their own credit score for you, and you’ll want to have all three of them.
When you have the three credit scores, you’ll only want to count the one that is in the middle, as the highest and lowest scores will be ignored by money lenders. Keep in mind that you won’t have to pay money to check your credit score, as there are plenty of businesses that will give it to you for free.
The importance of knowing your credit score is obvious, as you won’t get far without it in the first place. Unfortunately, there are many people who are under the mistaken belief that you have to pay or even register before doing a free credit check, but that is often not the case.
Even if you have checked your credit score relatively recently, you may want to check once more, just in case it increased since the last time. Having up-to-date records is essential when dealing with potential money lenders, as you will seem more reputable and your info will simply be more accurate.
2 – Ensure That the Credit Report is Accurate and Dispute Errors
Once you have received your credit score, you’re not out of the woods yet, as you will have to go through the info and check to ensure that it is accurate. Credit scores are not perfect, and there are times when you may find errors that need to be corrected, potentially raising your score substantially.
It is not uncommon for people to think that they have low credit scores until they finally check their credit, only to find it riddled with errors that negatively impact the score. There are plenty of potential issues, and they will typically depend on the person, as everyone’s finances are different.
For example, you may find charges on your credit report that you don’t recall, and if you dispute these misplaced items, you can improve your score dramatically. Once you dispute a charge, the burden will be on the creditor to prove that it is valid; otherwise, it will be removed within 30 days.
Even if you don’t want to dispute a particular item, you can correct personal info like old phone numbers and street addresses, allowing you to keep your credit report up to date. While these may not affect your credit score, ensuring that the data is accurate can help prevent headaches further down the line.
3 – Deal With any Outstanding Credit Card Balance
When it comes to your credit score, it is little surprise that credit cards play heavily into it. After all, a credit card is essentially a piece of plastic that represents a monthly loan to you. Since your credit score’s foundation is your likelihood to pay off your debts, your credit card history will play a huge part in determining your credit score.
This is often where people run into problems because they once overspent with a credit card and were unable to make the payments on time. Being financially responsible with a credit card is the best way to ensure that you don’t have to deal with poor credit in the first place, though not everyone has that luxury.
If you already have issues with your credit score due to credit cards, you can still take steps to ensure that they don’t hold you back. The first thing that you’re going to want to do is pay back any outstanding credit card balances you still have. You’ll find it hard for a lender to take you seriously if you still owe money.
Owning a home with bad credit is a matter of proving that the bad credit does not represent your current financial situation, and one of the best ways to do so is to pay off your debts.
4 – Fully Pay Off Collection Accounts
Tying into what we just mentioned about credit cards, you’ll want to do the utmost to deal with your debts, and these include collection accounts. A collection account is one of the worst things you can have on your credit score, and they are annoying to get rid of for many reasons.
One of the worst parts of a collection account is that you won’t be able to remove it from your credit report just by paying it off. You’ll have to go the extra mile and pay to have the collection account deleted once you have paid off the debt so that you can improve your credit score.
While this is certainly a nuisance, it will do you quite a bit of good, in the long run, to remove collection accounts from your credit report. A simple way to start is to send a debt validation letter, allowing you to see exactly how much you owe and the details of the collection account on your report.
The best part of a debt validation letter is that collection agencies will be obliged to reply within 30 days, or they will have to remove the account from your report. Unfortunately, the likelihood that they won’t reply is astronomically low, but it will let you get the full details beforehand, at the very least.
5 – Find the Right Lender for Low Credit
Another thing that you’re going to want to do is find the right lender to provide you with loans to buy a house with bad credit. One of the main issues of having bad credit is that the number of potential lenders available to you will decrease significantly, giving you a limited pool of options.
This limited pool of potential lenders will have universally high-interest rates due to the higher risk of working with a client who has low credit, putting you at a disadvantage from the start. However, don’t let this discourage you, as you will still be able to get your home, even if it means paying a little bit more.
FHA home loans are a favorite for clients with a poor credit score because they will allow you to get a home with a score that is as low as 500, though you will need to make a 10% down payment. If your score is over 580, then you’ll be able to get by with only a 3.5% down payment.
6 – Get Your Loan Pre-Approved
This step in the process comes along when you have everything in order, and you have found the right lender to cater to your needs. When you are comfortable with the terms of the arrangement, you will need to get your loan pre-approved so that you can get started house hunting.
What you’re looking for is a pre-approval letter, and getting one is not as complicated as many may assume. First off, you’ll need to speak to your loan officer and provide them with your credit information as well as your bank statement so that they can ensure that everything is on the up and up.
When your loan officer has gone over everything and found things to be in order, you can expect to receive your pre-approval letter. This is perhaps one of the easiest parts of getting a loan so that you can buy your home, as you will already have done all of the groundwork to get things established.
7 – Consider a Larger Down Payment
Finally, one of the easiest ways to get a loan for your new home with bad credit is to increase the amount of money you are willing to put down on your new house. A larger down payment will show that you have a greater commitment to buying the home, and lenders may be more forgiving.
When you have a more substantial personal stake in the matter, then you will be far more likely to pay off any loan that you take out for the home, and potential lenders are fully aware of this. Of course, there is always the issue that you may not have the money saved up to make a larger down payment.
As we mentioned in the previous section, a bigger down payment may be part of the terms of your FHA home loan, which is a typical option for those with low credit scores.
Once you’ve followed all of these steps, you’ll be ready to meet up with a real estate agent so that you can start looking into buying a house with bad credit. Getting a house should be something that everyone can do, regardless of their credit score, and it is possible to do so, even though many people seem to think otherwise.
Whether you’re looking to repair your credit to improve your chances of getting a loan, or if you want to make the most of your current situation, there are certainly options available to you. We hope that this guide has provided you with all of the info you need so that you can feel confident in making your home purchase.
Darryl founded Smith Financial Advisors Inc. in 2006 after over 30 years experience in financial services including Mergers & Acquisitions, Investment Banking and traditional Commercial Banking activities at Bank One. Smith Financial Advisors is a Registered Investment Advisor in the State of Illinois. The firm specializes in Investment management, financial planning, and retirement planning.