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Buying property can be stressful—especially if you have bad credit. In 2021, the average VantageScore® in the United States was 695. And, generally speaking, experts say you need a score of at least 620 to secure a conventional mortgage. These statistics may scare some people with below-average credit scores and leave them wondering how to buy a house with bad credit.
The good news is that it’s possible to buy a house with bad credit. This is because your mortgage application approval is dependent on more than just your credit score. In fact, several factors contribute to your approval. We discuss these factors and how they can help you in this post.
A conventional mortgage often requires a credit score of at least 620. However, this minimum isn’t set in stone because lenders consider other factors in addition to your score. If your application is appealing in other vital areas, it can make up for a less-than-ideal score.
Below are the other factors that lenders consider when appraising you for a home loan:
Before we discuss how to get a mortgage with bad credit, we need to cover two crucial tips. First, don’t trust “guaranteed” approval loans that promise you a mortgage regardless of your credit score. All lenders must do their due diligence to review your financial status and ability to repay the loan. Even if you get that “guaranteed” approved loan, you’ll typically find it comes with highly inflated borrowing costs.
Second, avoid making big changes to your finances while shopping for a mortgage—unless they’re positive changes, like paying down debt. You want to avoid switching jobs, getting a new car or closing out credit cards.
Now that you know what not to do, let’s focus on what you can do to get a mortgage:
As we’ve mentioned, a larger down payment can help you appear as a less risky borrower. Larger down payments mean you borrow less from the lender, which in turn reduces their overall risk. If you can offer a significant down payment, it can potentially make up for a bad credit score.
If you don’t think you can save up a large down payment on your own, consider getting help. There are over 2,500 down payment assistance programs, typically offered at the state and local level. You may qualify—and benefit—from one of these programs.
Bad credit home loans are typically offered to individuals with a credit score below 575. These loans generally come with higher-than-average interest rates, but if you use them smartly, they can help you improve your credit score. Take out this loan before you apply for a mortgage and use it to rebuild your credit history.
When you have bad credit, one problem you may come across isn’t loan approvals but the loan terms. You may find that you can get a mortgage, but it comes with an incredibly high interest rate.
Don’t assume your first approval is the only one you’ll get. Instead, you’ll want to shop around and compare different mortgage offers so you can secure the lowest rate and best overall loan terms.
A word of caution when shopping for lenders—you’ll want to avoid multiple hard inquiries. When a lender gives you loan approval, they have to conduct a hard inquiry into your credit. A single hard inquiry will dip your credit score by a few points, but your score will recover in a couple of months. However, if you have multiple hard inquiries in a short period, it can cause a significant decrease in your credit. This can harm your chances of getting a reasonable interest rate and mortgage approval.
You’ll know when a lender does a hard credit pull because they need your permission to do so. To protect your credit, only get preapprovals when you’re comparing lenders. Preapprovals use a soft inquiry into your credit, which doesn’t harm your credit score. Based on the preapprovals, you can pick your top choice and give that one lender permission to pull a hard inquiry.
Consider using a cosigner if you don’t think you can get a mortgage approval or don’t think you can secure a decent interest rate. When you have a cosigner, lenders look at their credit as well during the loan review process. So, having a cosigner with a healthy credit score can help balance out your bad credit.
Note that a cosigner essentially promises to carry the burden of the loan if you stop making payments, making this a big favor to ask of someone.
Rent-to-own (RTO) is a type of loan option in which you initially sign a rental agreement on a property. The contract specifies that a portion of your rent payments will apply to your potential home purchase if you decide to buy the property at the end of the lease.
Note that RTO can be complicated and comes with advantages and disadvantages. Make sure you do your research into this option to understand better if it’s right for you.
Some types of mortgages are designed to help people with lower credit scores.
If you haven’t started your mortgage application process yet, there’s still time to be proactive. You can take steps to improve your credit score and therefore improve your chances of a mortgage approval. Here are the top five steps you should take:
Buying a home is expensive. Create a budget and prioritize saving as soon as possible so you can prepare yourself for the down payment, closing costs, fees and more. Having substantial savings is also a factor that will make you look more appealing to lenders.
Your payment history is the largest of the five factors that contribute to your credit score, making up 35 percent of your score. If you miss or make a single late payment, you can potentially see your credit score go down. On the other hand, building up a history of on-time payments helps you appear a responsible borrower.
All three major credit bureaus offer consumers a free copy of their credit report every 12 months. Always review your credit report to catch any mistakes and know what your lenders are going to see when they access your file.
Closing credit cards can have two potential impacts on your credit score. First, it can lower your credit history. Second, it can cause your credit utilization ratio to spike. Avoid closing your credit cards until after you have your mortgage.
There are professional services that can help you examine and repair your credit. These professionals can spot mistakes, file disputes and educate you on how to improve your credit. Consider working with Credit Repair today to get help towards fixing your credit.
