Strategies for Buying a Home with Bad Credit

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One of the key components of the American dream is the ability to buy a house. However, only a small fraction of people can afford to buy a home upfront without having to apply for a mortgage.

Mortgages can help aspiring homeowners pay for the entire purchase price of a property if they don’t have enough money, but with so much paperwork to submit before getting approved for one, the application process can be quite complicated and time-consuming.

The following are the documents needed when applying for a home loan: proof of income, tax returns, bank statements, renting history, credit report, and a photo ID. The most important of which is a credit report because the type of loans and the interest rates available to prospective homeowners are determined by their credit scores.

Most people with bad credit may not qualify for traditional mortgages, but they’re eligible for home loans that have much higher rates. Buying a home with bad credit or no credit at all may not be easy, but it’s definitely possible, it just might end up costing more money in the long term.

Here are some strategies to try out to be able to afford a home even with a bad credit score.

Save up for a substantial down payment

Preparing a substantial down payment makes it much easier for borrowers to get approved for a mortgage with a lower interest even with a bad credit score. This is because more money being offered means less risk for the mortgage lender and shows that the borrower is prepared to shoulder more of that risk. It also assures the lender that the borrower is less inclined to back out of the loan since there’s more money involved. As a general rule, it’s recommended to save a down payment of at least 20% of the total price of the home.

Reevaluate home budget

Most people are tricked into buying a home that’s way beyond their means, which is why they take on large mortgages with high-interest rates. Those with bad credit most likely won’t get approved for a sizable mortgage, so they’ll have to readjust their housing budget to something more realistic. This is especially important because the purchase price isn’t the only cost that the prospective homeowner has to shoulder. There’s also Homeowner’s Association (HOA) fees, taxes, home maintenance and repairs, closing fees, and insurance to think about.

Consider an FHA credit loan

Federal Housing Administration (FHA) credit loans are ideal for high-risk, low-income borrowers with bad credit because it offers reasonable closing fees, manageable credit qualifying, and low down payments as low as 3.5%. Even though they require higher mortgage insurance, they’re still the best option for people who may not otherwise be able to purchase a home.

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Seek advice from housing and credit counseling services

Credit counselors help people who don’t know where to start when it comes to improving their credit score and pay off their debts. They can offer helpful advice when it comes to budgeting and managing financial obligations. On the other hand, housing counselors are there to walk people through the complex process of buying a home, including identifying closing cost assistance and FHA programs as well as how to tackle the most common hurdles towards homeownership such as bad credit, low income, and credit card debt.

Don’t rule out rent-to-own house options

With a rent-to-own property, aspiring homeowners can rent a home from a seller and pay their way towards ownership. The tenant will pay a supplemental amount of money for a specified period along with their monthly rent. Eventually, the extra money will be added to the down payment for the home. This gives them an opportunity to save up a significant down payment while also rebuilding their credit. Once the prearranged period ends, the tenant can apply for a traditional mortgage which will go towards purchasing the home.

Be on the lookout for seller-financed deals

Seller financing means that the buyer will borrow funds from the seller of a home, rather than from a traditional commercial lender. This is often more manageable for individuals with bad credit or no credit at all since the seller and the buyer will be the ones to agree on the monthly payment amount, interest rate, payment schedule, and whether a credit check is needed. There are also some investors who buy foreclosed houses at auction, and sell the homes for profit, usually to low-income, no credit, or high-risk individuals.

There are plenty of ways to become a homeowner even with a bad credit score or no credit at all. These strategies are just some methods to consider when trying to fund the purchase of a dream home.


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