How to Finance a House with Bad Credit?

Are you one of those people who don’t know where to start when purchasing a house? Suppose you feel lost in the labyrinth of complex real estate finances. Or, you’re prone to give up easily on your dream home because your bad credit score or low income wouldn’t qualify you for a mortgage anyway. 

In that case, we have excellent news for you! Millions of Americans successfully get a loan yearly despite financial trials and tribulations. Join us, and get one step closer to accomplishing your goals!  

Your credit score and history take center stage.

So, you’re determined to finance your first home in the new year, no matter what. Here are the essential things you need to know. Firstly, buying a house depends on your credit score (ranging from 300 to 850) if you go with applying for a conventional (or government) loan. 

Are you creditworthy?

Your credit history reflects how you handled your income and debts in the past. 

• Your credit score will tell anyone whether you settle taxes and fees in time. Also, see: 

• The credit and loan type you used in the past.

• What sort of goods and services do you purchase with your credit?

• It will show any new credit accounts.

• The duration of your credit history will be revealed.

Based on this, your loan lender determines your creditworthiness and whether you will be a trustworthy borrower. Thus, it’s no wonder they have established the so-called minimum credit score criteria. The higher your credit points go, the more likely you will qualify for a mortgage on excellent terms! In other words, you will pay lower loan interests in the upcoming years. 

Let’s point out something crucial right off the bat! Regularly, a bad credit score in the United States is anything below 670. Still, every lending institution will establish its own minimum credit score system.

Where can you check your credit score before moving along?

Most importantly, you can verify your FICO (Fair Isaac Corporation) credit on the MyFico website, the official credit reporting company. You can also request your credit card company to release an official statement. Or you can visit an online credit service site.

Which credit score qualifies you for a conventional v. government loan?

Typically, a traditional loan (not backed by the US government) will be eligible at an average score of 620 (or higher.) What happens if you fail to achieve the minimum score? Your bank may decline to give you the money or can greenlit your project at a higher interest rate.

On the other hand, most government-backed loans will lend you money at a lower credit score. For example, the FHA loan is eligible at 500, and the VA loan at a credit score of 580. At the same time, you must have a credit score of 640 (at least) to apply for the USDA loan.

How should you go about buying a property with a bad credit score?

As we mentioned, banks and other licensed lending agencies set different rules for loan applicants. You can start applying for a conventional mortgage loan at your local bank and, most importantly, a mortgage lender or broker. Who knows? You may get lucky, especially if you dispose of a median or higher income presently. 

Choose a mortgage broker over a bank!

Unlike a bank that doesn’t have a unique program devised for clients with bad credit, a broker has numerous wholesale relationships with various lenders. As a result, they can “shop your loan around” to check whether a lender can approve it and at what interest rate. 

Moreover, they have the essential resources, time, tricks, and tips to help patch your lousy credit. In a word, assisting you will also serve their own benefits because this is their primary source of income.

Amend your existing credit score!

You can boost your current credit by settling balances, paying off old debts, or submitting a credit limit increase plea. This request can result in lowering your credit utilization. 

Secondly, you can add new accounts. Consequently, you’ll broaden your available credit on your report and improve your payment history. 

Thirdly, stay away from hard credit inquiries! Such an audit solicits your entire credit history from a credit office like Experian, Equifax, or TransUnion. However, did you know that hard inquiries, if done repeatedly, actually hurt your credit score? It can create the wrong impression in the mortgage lender that you intend to (irresponsibly) apply for various credits or loans.

Have someone with good credit co-sign your application!

Some mortgage and loan applications enable you to work with a co-signer. Generally, a family member, close friend, or associate assumes this financial risk. Banks or mortgage brokers take a surety (a person legally liable for your debt) as extra financial safety. 

It will boost you over the critical credit threshold because the institution will count the co-signer’s assets and income into your overall credit score. At the same time, a surety decreases your debt-to-income ratio aiding your loan eligibility.

Gift funds or cash gifts can be an efficient alternative. You can accept money from someone to improve your credit score as long as the lender can ensure the transfer’s legality. For this purpose, carry out the transfer with a signed gift letter!

No banks, no mortgage lenders, and no credit history!

Suppose, for various reasons, you don’t want to choose the traditional ways of obtaining a loan or mortgage. In that case, we suggest you examine the following options! 

Firstly, the way owner financing works allows you to pay for a home directly to the seller. In the short run, owner financing means you can save time and closing expenses (since no go-between will be involved.) Once you agree to the owner’s terms, you can move into your new home. However, flexibility and efficiency come at the price of a more significant down payment, greater interest, and a lump sum as your final payment.

Secondly, you can track down homeowners who fall behind on their mortgage payments and risk foreclosure or bankruptcy. As a result of their dire straits, they might sell you the property on more favorable terms and leave the mortgage in place.

The mortgage doesn’t need to be paid off before the house changes owners. We call this method subject to a mortgage or trust deed.

You can find such intel in county records and local MLS (Multiple Listing Services) systems. Therefore, you can get a house without mortgage loan approval and at a bargain. 

Conclusion

You shouldn’t let a bad credit score rain on your homeownership dreams! Instead, you might have to do more research and find creative solutions to your financial predicaments.

Virtually, you have two options. Firstly, you can apply for a conventional mortgage loan or government home assistance. In these cases, you must improve your credit score in any shape or form possible! Secondly, you can exclude the bank or any other traditional lending agency. Then, owner financing and the “subject to” methods will offer you the solutions you were looking for.

Nonetheless, managing a flawless credit history is undoubtedly paramount if you ever want to apply for a loan. For this reason, we wholeheartedly recommend improving your credit score before submitting your application for any substantial loan!