As the real estate market continues to heat up and interest rates rise, a lot of people are feeling the pressure to purchase a home while they can. Unfortunately, it’s not always as simple as clicking a button and getting a mortgage. If you have bad credit, unique challenges are around the corner.
5 Things to Consider With Bad Credit
Anyone who tells you that bad credit doesn’t matter is lying to you. Having bad credit – anything below a 650 – makes it extremely challenging to get a mortgage. Recognizing this fact, here are some things you should do to increase your chances of being able to buy a house with bad credit.
- Start Repairing Your Credit
The very first thing you need to do is actively start repairing your credit. The home buying process can be lengthy. Starting now may allow you to give your score a boost by the time you’re actually ready to purchase.
Just as a refresher, your credit score is comprised of the following five factors: payment history (35 percent), outstanding debts (30 percent), the length of your credit history (15 percent), types of credit used (10 percent), and the amount of new credit (10 percent). By tackling each of these elements one at a time, you can gradually improve your score over a period of a few months.
- Look at HUD Homes
If you have a credit score that’s well below 650, then one of your best options is to look at homes from the Department of Housing and Urban Development, known as HUD homes, which are sold at discounted rates. These are typically foreclosed homes and mortgage down payments range from 3.5 percent for credit scores above 580 to 10 percent for those below 580. Hurricane survivors, teachers, and emergency services personnel may even be able to qualify for discounts of up to 50 percent. It’s worth checking out.
- Find a Cosigner
If – and that’s a big if – you can find someone who is willing to cosign on a mortgage with you, it’s possible that you may find a lender who will give you a loan. A cosigner essentially promises to be held responsible for the loan in the case that you’re unable to pay. Obviously, the cosigner needs to have good credit and understand what they’re getting into before agreeing to sign off.
- Save for a Larger Down Payment
If you want to look better to the bank, you can save up for a larger down payment. While a lender may not be willing to give you a $144,750 loan on a $150,000 property, they might offer you a $125,000 loan if you can come up with a $25,000 down payment. The more skin you have in the game, the better.
- Use Seller Financing
Finally, seller financing is always a creative option that can be tossed around when you find a property that you really like. In this situation, you provide a down payment and the owner of the house actually accepts monthly payments from you (as a lender would) until it’s paid off in full.
Start Digging Yourself Out
The worst thing you can do is sit there and wallow in despair over the fact that you have poor credit that’s preventing you from getting a mortgage. This “woe is me” attitude won’t get you very far. If anything, it’ll ensure you stay in your present situation for longer.
Instead of complaining about your circumstances, now’s the time to begin digging your way out. Bad credit may be holding you back, but it doesn’t have to be a death sentence. Take proactive steps and all will be fine.