Buying a home right now seems like a nearly impossible task, even for people with good credit. So many people have had their homes foreclosed on, or are so underwater on their mortgages that the only way to survive is to have a short sale. It seems like unless you have a rock solid job and pristine credit, that you’ll never buy a home.
It doesn’t have to be that way. By knowing what your credit score its being prepared to qualify for a higher interest rate, and saving up a good down payment, you may very well be able to buy a home with bad credit.
First, your FICO score is important. FICO scores are your credit worthiness scores, and tell lenders how much of a risk you are. If you know you have bad credit, but don’t know how bad it is, get your FICO score from both TransUnion and Equifax. It shouldn’t cost very much, just avoid the “free” credit report places. And look at it this way: whatever it costs you to know your credit scores is cheaper than finding out the hard way. So find out.
Next, know that bad credit means you’re not going to get an ideal interest rate. The lower your credit score, the more you’ll pay. If your credit score is under 500, you may be paying as much as $900 more per month for a $200,000 loan. Most likely you will be unable to get a loan at all, because lenders will see you as a risk.
Bumping your credit score even 40 points can land you a better interest rate. Typically lenders tier their interest rates, so 500-549 is one tier, 550-599 is another, and up they go. If you can push your credit score up into the next tier, you may qualify for a lower interest rate, and that can save you as much as $200 a month on your house payment.
If you can come up with a good down payment, you will find it’s easier to get a loan on a house. Many places offer 0% loans, but if you credit isn’t stellar, you may have trouble securing one. Also, if you don’t have a down payment, or have one of less than 20%, you may be required to have a PMI policy. PMI is Private Mortgage Insurance, and is required for anyone taking out a loan that’s 80% of the value of their home, or more. So, if you can save up a 20% down payment, you can avoid PMI, and prove to your lender you’re responsible, even with poor credit. That increases your chances of a home loan.
Buying a home with bad credit isn’t impossible. Sure, it can be tough, but if you’re prepared with your credit score, understand you may have a higher interest rate, and can save up a decent down payment, you may find that owning a home is within your reach.