Is it still possible to purchase a home even if you have bad credit?
Buying a home with bad credit is possible, but it may not be as easy as it was before the housing bubble. For sure, your options will be limited.
After the housing bubble, lenders put into place mortgage lending restrictions which have made it difficult to attain the dream of homeownership, especially if you have a poor credit score. For many lenders, lending money to people with a bad credit history means increasing their risks. In order to counterbalance this, they impose higher interest rates.
Credit scores range between 300 and 850. People with no or little credit history are often placed in the lower spectrum. If your credit score is 650 and below, you will face an uphill climb in securing a mortgage.
But what exactly are your options and what can you do if your credit score is not stellar?
The first thing you need to do is to double-check your credit reports in order to ascertain whether there are errors that need to be corrected or if there are collections you need to pay first. Essentially, this will enable you to check where you stand financially.
Next, you need to make a commitment to improving your financial habits in order to show lenders that you won’t commit the financial mistakes you have made in the past. This is also the best time to whittle down your existing debts.
Then,what you should do is gather all your documents pertaining to your income and financial history. This will allow you to better convince lenders that you are eligible for a loan. These documents include your tax returns, bank statements, pay slips, W-2s and, if applicable, documentation of your assets like stocks and bonds. You’ll also have to provide potential lenders proof of stable work. It is also a good idea to draw up a spreadsheet containing your monthly expenses and existing debts, like car payments.
Whenever possible, find a co-signer who will not only improve your chances of getting an approval but can also help secure better loan terms for you.
In securing a mortgage, you have three basic options to choose from. First, you can try securing a loan from either Fannie Mae or Freddie Mac, which offers the advantage of low down payments. However, you have to have a credit score well above 620. If your credit score is lower than this, you can try securing an FHA loan. The catch is that you have to pay a downpayment of about 10 percent. Your final option is to try your luck with private lenders.
