11 Things You Know About Buying a Home with Poor Credit
Buying a home is a dream for millions, but for those with low credit scores it can seem like their home loan options are limited. However, if you'll remember a few key things you could find much better results from the process and actually secure a loan that works for you – despite a low credit score. Here's what to remember.
- What Your Credit Impacts – The first thing to understand is just what poor credit will do in terms of your home buying process. The first is that it will have a direct impact on your ability to secure a loan. Your lower credit reflects a higher risk to lenders, which makes them more reluctant to issue you a loan.
Additionally, your loan will generally come with higher interest rates as a result of your credit. You may be able to secure a loan with poor credit, as we'll cover below, but remember that it will usually come with a higher interest rate and other terms that traditional good-credit loans don't have.
- Down Payment Basics – Your down payment is directly impacted by your credit, as well. Higher credit scores can often mean lower down payments. In some cases, you'll need as much as 20% of the total home price down, while certain loans could require as little as 3.5% on government loans in particular.
- Pre-Approval Letters – Getting pre-approved for a loan can help you have a clearer idea as to what kind of budget you're shopping on and what options you have available. Most banks and mortgage brokers will offer a pre-approval letter with no obligation. Getting pre-qualified on a poor credit home loan is a solid first step that is well worth taking to make sure you're ready to start the home buying process.
- Landlord Referrals May Matter – One of the big challenges for many first time home buyers with bad credit is that they have no history of paying a mortgage. To counteract this, turning in landlord referrals to support your ability to pay monthly payments on time and to show that you're responsible is something that many lenders encourage.
- Renter History Is Important – Your history as a renter has a big impact on some loans. Bring in proof of your past payments, how long you have lived there, and more. It can help show that you deserve a loan, even if you have poor credit scores.
- Debt To Income Ratio – Debt to income ratio has a big influence on your ability to secure a loan as well. In many cases, this is actually just as important as your credit score. The amount of debt you have versus your average annual income has a tremendous impact on loans and your ability to secure them. Pay off existing debts to improve this ratio and get the best chances at a great loan.
- FHA – The Federal Housing Administration is a program created where consumers can apply for a government backed loans that are known for offering the easiest path to securing your loan. By lowering down payment requirements and credit score requirements, these loans have made it possible for millions to secure loans that they wouldn't otherwise have been able to get. If you have poor credit and are looking for a loan, they're worth paying attention to.
- Employment Records Matter As Well – A long history at your job also has a big influence on loan acceptance. Solid employment history and the ability to prove your income matters dramatically, and can show that you are able to repay the loan you take out.
- Credit Repair Starts Early – If you want to go through the process of repairing your credit to improve your loan opportunities, start early. Doing so is key because it can take time to dispute inaccuracies, and done incorrectly can actually have a negative short-term impact on your credit rating.
- Saving Up Ahead of Time Can Help – Also, start saving up funds early as well. Having a solid savings is important and can help you pay for down payments or handle repairs if you buy a fixer-upper home.
- Fixer Uppers Are Valid Options – Speaking of which, fixer uppers and homes in more rural areas often offer extra benefits since they can be bought using more flexible loans. They're worth thinking about for anyone.
If you'll keep these 11 key points in mind, you should be able to start taking the steps now that can have a dramatic impact on your life throughout the future – by helping you secure the home loan that you need. It's important for you be realistic when shopping for a poor credit home loan program. Your home buying process may not be as smooth or simple as someone with perfect credit, and your interest rate may not be as low. But you do have options, and it all starts with being able to understand the reality of your situation. It's important to remember that you do have options, you just have to know what they are in order to take advantage of them. How to Qualify for a Second Chance Loan for New Home Buyers from FHA