Buying a Home With Poor Credit: What You Need to Know

What are the options for someone like me with poor credit? The housing crisis took an enormous toll on millennial homebuyers and long-time homeowners alike, especially here in Las Vegas.

Millions of people who had spent years building careers or who were just starting out in life lost their homes due to pay cuts, job losses or other financial disasters. In the wake of that, there is an overwhelming number of people hoping to get back into homeownership, but buying after bankruptcy can be tough.

Click here to download our FREE guide to repairing your credit after a bankruptcy or foreclosure.

While it can be difficult to cope with the loss of a home, it doesn’t have to mean an end to being a homeowner. If your credit score took a hit due to a bankruptcy, foreclosure or short sale, you can still obtain a mortgage and get back on track to making your dreams of home ownership a reality.

Are Home Loans Impossible for Someone Like Me?

Home loans are available to those with poor credit. A bad credit mortgage, also known as a sub-prime mortgage, has a high interest rate compared to other mortgages. It may include stipulations against early repayment and a balloon payment penalty, which may require you to pay off the home in a lump sum after five years.

FHA and VA loans are also attractive options for borrowers with poor credit due to their lower restrictions.

When Does Poor Credit Prevent People from Buying a Home?

There are few legal guidelines that determine at what point your credit score is too low for a mortgage. However, LendingTree reports that lenders will not work with you if your credit score is below 620, while a score below 500 disqualifies you from FHA loans.

You may also be unable to obtain a mortgage if you have had a recent foreclosure. FHA loans require a three-year waiting period after a bankruptcy or foreclosure, and a two-year period for VA loans.

Buying a House With Bad Credit: The Challenges

Those with bad credit face the following problems when buying a home:

Getting a Mortgage: If your credit score is too low, you might have trouble finding a lender who is willing to work with you. You may have to take steps to improve your credit before obtaining a mortgage.
High Interest Rates: If you are able to obtain a mortgage with poor credit, you will likely face higher interest rates.
Low FICO Score: Your score might be too low to qualify with most lenders, which means you will need to raise it before obtaining a mortgage.
Previous Foreclosures or Bankruptcies: These can prevent you from obtaining a mortgage if you have not gone through the necessary waiting period.

Home Buying Tips When You Have Bad Credit

Here are a few tips that can help you buy a home with bad credit.

Make a Bigger Down Payment: Mortgage lenders are much more likely to work with you if you can make a large down payment. Smart Asset writes that most down payments range in size from between 5-10% of a home’s value, and that you can gain more favorable terms with each 5% increase.
Accept a Higher Interest Rate: Many lenders will still work with you if you have bad credit but will offer higher interest rates. Carefully read the terms of your loan and investigate the lender as many predatory lenders target homebuyers with bad credit.
Get a VA or FHA Loan: Government-backed loans generally have lower interest rates and more flexible conditions than private mortgages.
Fix Your Credit: Check your credit report and dispute any errors you find. Try paying off debts and making payments on-time to improve your credit.
Work with a REALTOR®: A REALTOR® can provide you with expert guidance during your home search and can help you find the properties and lenders best suited to your situation.

Just because you’ve had few setbacks doesn’t mean you can’t make your dreams of homeownership come true. Many people are able to rebuild their lives by taking the steps above.

Buying a Home With Poor Credit: What You Need to Know