How To Become A First Time Home Buyer With Bad Credit

Is bad credit damaging your chance of owning your own home? A low FICO score counts against you but won’t ruin your chances altogether. With several programs for buying a home with bad credit available, you can still succeed. In this article, we’ll look at what bad credit and its consequences are. We’ll then look at how a first time home buyer with bad credit can apply for a mortgage.

What You Need to Know About Bad Credit

Your FICO score ranges between 300 and 850:

  • 670 and above: Good to exceptional scores get the best rates
  • 580 to 669: With a fair credit score, you still have a chance of getting credit, but not at preferential rates
  • 579 and lower: Bad credit home loans usually include borrowers in this category

The Vantage Scoring model, as used by TransUnion, Equifax, and Experian, is stricter:

  • 781-850: Exceptional
  • 661-780: Good
  • 601-660: Fair
  • 500-600: Poor
  • 300-499: Very Poor

What Affects Your Score?

  • How good you are at paying your accounts on time and in full: Late payments drop your score and may disqualify you from receiving a mortgage with bad credit.
  • The number of credit accounts you have: You’ll need to have a few accounts in good standing to qualify for a good rating. Having too many, however, can damage your score. If you have five credit cards or personal loans, for example, it may look like you cannot manage your debt.
  • How much of your overall credit limit you utilize: The higher your debt utilization ratio, the more significant the negative impact on your application. Lenders reason that maxed out credits show you’re not capable of managing a home loan with bad credit.
  • The nature of the debt: Having many revolving credit facilities, however, may damage your score because you can draw out whatever you’ve paid in.

What’s the Minimum Required Score?

According to Forbes, not having a high credit profile is the reason for one out of three declined mortgage applications. The average lender requires a minimum credit score of 600 – 620 to finance a home. There are, however, exceptions – you may qualify for FHA mortgage loans for bad credit with a score of 500.

Consequences of Bad Credit

Aside from making it difficult for a first time home buyer with bad credit, a low score may result in:

  • Greater difficulty in obtaining unsecured loans or credit cards.
  • High-interest rates from companies willing to take the risk of providing bad credit first time home loans.
  • Difficulty in securing a rental property.
  • Higher security deposits to secure utilities and other services.
  • Difficulty in getting a good job.
  • Being denied a cell phone contract or similar subscription service.
  • Higher insurance premiums and deductibles.

How to Buy a House With Bad Credit

Let’s say that you’ve done your research and want to buy a house with bad credit. What are your next steps?

Check Your Credit Report

Step one in obtaining low credit score home loans is to know what your FICO rating is. You may get a free annual report from any of the major bureaus. Scrutinize the information and ensure that all the entries are valid. If there are errors, contact the bureau about them. If there are accounts on there that you’ve repaid, contact the companies concerned. They may remove the listing or at least mark it as paid in full.

Improve Your Credit Score

Before asking, “Can I buy my first house with bad credit?”, try to fix your credit score. Give yourself six months, and, during that time:

  • Pay all your accounts on time.
  • Where possible, pay more than the minimum installment.
  • Try not to max out your cards and store accounts.
  • Don’t take any other credit accounts or loans.

Save a Large Down Payment

Getting a mortgage with bad credit may depend on how much your deposit is. During the six months, save as much as possible toward your down payment. Work out how much your mortgage fees, taxes, and insurance would cost you monthly. Reduce that figure by your current monthly rental and save the difference or more. You’ll be able to prove you can afford the loan and also save a sizeable down payment. The higher your down payment is, the more equity you have in the property at the start. The bank will look more favorably at your application as the loan-to-value ratio is lower.

Speak to a Housing Counseling Agency

The government funds housing counseling agencies nationwide. These agencies provide advice about:

  • Buying and renting homes
  • A reputable bad credit mortgage lender
  • Assistance programs you may qualify for
  • Budgeting
  • Dealing with potential roadblocks like foreclosures

FHA Loans

When learning how to buy a house with low income and bad credit, an FHA loan is your best bet. To qualify, you’ll need:

  • A credit score of at least 500, coupled with a 10% down payment
  • A rating of 580 to drop the down payment required to 3.5%
  • No bankruptcy events during the last 2 years (unless you can prove it was due to uncontrollable circumstances)
  • To have worked for the same company or prove an income for 2 years
  • No foreclosures within the last 3 years
  • To be up to date with your student loans and taxes
  • An owner-occupied property
  • To demonstrate that you’re working on cleaning up your credit

VA Loans

VA loans are available to veterans of the Armed Forces through approved bad credit mortgage lenders. The conditions include service of at least:

  • 181 days during peacetime
  • 90 days during wartime
  • 6 years in the National Guard or Reserves

When a service member dies in the line of duty, the spouse may also be eligible. “Can I buy a house with bad credit under this program?” is a common question. The answer is generally, “No.” Service members are required to have reasonable credit histories to qualify. The following factors may also affect eligibility:

  • Dishonorable discharge
  • Having a VA loan that went into foreclosure before
  • Not being married to the service member

Approved lenders should be able to tell you if you qualify or not. Your credit score and down payment have a significant impact on your eligibility. There are, however, a few other factors that mortgage lenders consider.

What Else Do Mortgage Lenders Consider?

The reason that you may be able to find a mortgage lender even with bad credit is that there are other criteria lenders consider:

  • Income: Wondering how to buy a house with bad credit but good income? Your mortgage repayments should account for 35% of your salary or less.
  • Debt-to-income Ratio: Your overall debt-to-income ratio must accommodate the installment and ancillary fees comfortably. This is particularly important with poor credit home loans.
  • Length of Employment History: Aside from the FHA and VA loans, there’s no required employment history. However, you must be permanently employed or receive a regular income. If you job-hop regularly, you’re considered a greater risk.
  • Co-Signers: Finding a co-signer is the answer to how to buy a house with no money and bad credit. You’ll need to find someone willing to act as a guarantor for you. Should you not pay, they’ll be liable for the debt, so this may be a tough sell.

Wrap Up

Trying to buy a house with bad credit is complicated but possible. Your first step is to see whether you qualify for government or down payment assistance programs. Even if you’re not eligible for these programs, there’s hope. Work on improving your credit score, proving affordability, and saving a large down payment. If that fails, try to get a co-signer on board.

FAQ

Can I buy my first house with bad credit?

Yes, the surest way to buy a house with bad credit is to apply for government-backed loans. Speak to a housing counseling agency to learn about your options.

Can I get a home loan with a 500 credit score?

You may qualify for an FHA loan if you have a deposit of 10%. You may work in conjunction with down payment programs for further assistance here.

What credit score does a first-time homebuyer need?

For conventional loans, the minimum credit score required is 600-640. FHA mortgages allow for lenders with scores of 500-580.

What are the government programs to help me buy a house with bad credit?

The government has a few programs available. FHA-backed loans allow homebuyers to purchase family homes. VA loans support active members of the Armed Forces and veterans. USDA loans help you buy a property in a qualifying rural area.

Other programs for buying a home with bad credit include Freddie Mac Home Possible and Fannie Mae’s HomeReady.

How can I buy a house with bad credit and no money down?

That depends on how bad your credit is and if you qualify for government assistance or not. With a standard mortgage, banks are reluctant to give a 100% mortgage to those with poor credit. You’ll have to prove affordability and possibly get a co-signer.

Do any companies provide bad credit mortgage loans with guaranteed approval?

While personal loans for bad credit with guaranteed approval exist, when it comes to mortgage lenders, the closest you’ll get is a preapproval. However, even these are dependent on the final credit application. You’re better off taking our tips on how a first time home buyer with bad credit can succeed.

ABOUT AUTHOR

Jack of all trades, master of anything from everyday products to innovative software. I've loved writing since I can remember, and if I get to make someone's life easier while doing it, it's a win-win. When I'm not typing vigorously, you can catch me reading fantasy novels or riding a bike.

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