Many of the advertisements around today make it sound like having bad credit is the end of the world. While it’s not great to have bad credit, it certainly does not mean you have to stop living. There are plenty of options available to people without ideal credit, you just need to know how to handle your credit choices moving forward. Here’s how to buy a home with bad credit.
Why is your credit bad?
The first thing to establish when you are trying to figure out how to buy a home with bad credit is why your credit is bad to begin with and how you can ameliorate it. If you have foreclosed or claim bankruptcy, know that the mark remains on your credit report for 10 years. If you have had to deal with collection accounts, those remain for 7 years. Minor incidents
, like a missed credit card payment or a bad check cause lesser damage, but those points can collect over the years. Knowing your credit issues allows you to know where you’ve messed up in the past, so you can discuss openly and knowledgeably with your mortgage or loan officer.
Watch your rates
You are eligible for better rates for a conforming loan 4 years after bankruptcy. You may get your loan for as little as 3.5% down, but hard-money lenders will charge you up to a 35% down payment. What you want to do in these instances is know what you can put down on a house ahead of time and work with mortgagers to find a loan that works with you accordingly. Also know that if your FICO rate is under 640, it will exponentially increase your interest rate (e.g.- for 600-640, your interest rate will be 1.625% over the prevailing rate).
Consider alternatives to bank-financing
If your credit score is very low, or if your bank is not willing to work within your means in order to finance your new home, you may decide to go elsewhere for your home loan funding. Seller financing, specifically through land contracts, are a viable alternative with lower interest rates, faster closing, and flexible terms and down payments. The lender for these arrangements should be a verified broker with whom you can establish a relationship, specifically in terms of negotiating refinancing annually.
Buying versus Renting
If you really cannot find a viable lender, either from a broker or a bank, you may be in better shape to rent short term before going into the buyers market. While buying a home gives you more clout in terms of annuity and property owning, foreclosing on a home can do even more serious damage on your credit score. Renting does not do as much for your holdings, but having a good track record as a renter allows you to argue better credit and better credibility when you go to buy a home in the future.