“You can’t buy a house with bad credit.”
Written by Northwest Mortgage
Published on Thu, Nov 12, 2020, Last Updated on Thu, Nov 12, 2020
Most of us have likely heard this. However, it’s far from the truth. Although securing a mortgage on a home may be difficult, it isn’t impossible. If you can pay a higher interest rate and put down a larger down payment on the house, you can buy a home with bad credit. If you are in this situation, there are a few things you should know about buying a house when you have a bad credit score.
Know How Much You Can Afford to Pay
You may need to talk to your financial planner or accountant to learn the amount you can afford to spend on paying off your mortgage each month. Knowing the down payment you can afford to pay will help you figure out your price range for a home. Don’t apply for bad credit home loans without knowing how much you can afford because, if you ask for too much, they’ll reject your application for a home loan.
Find Out Your Credit Score
Your credit score can be as high as 850 and low as 300. Credit scores that are more than 740 are regarded as good credit. If your FHA credit score is below 640, it’ll be difficult for you to secure a mortgage. Check with the three credit reporting agencies, Transunion, Equifax, and Experian. You can speak to your mortgage broker to help you secure a home loan even with a bad credit score.
Review Your Credit Report for Errors
If you find errors in your credit report, that’s a good thing, as it can increase your credit score. Go over your credit report carefully and if you find an error, you can dispute it with the credit bureaus. Fixing even one error can make a world of difference in your interest rate.
Apply for the Federal Housing Administration Loan
If you have bad credit, you can apply for the Federal Housing Administration (FHA) loan through your mortgage broker. The FHA loan requires you to make a down payment of 3.5% on the purchase price of the home if your credit score is 580 or more.
You may also be eligible for an FHA loan if your credit score is 500 but will need to put down a higher down payment. The disadvantage of an FHA loan is that you need to maintain Private Mortgage Insurance (PMI) throughout the duration of your home loan. After a while, you may be able to remove PMI, and if you have had it for two years and want to know if you can remove it, let us at Northwest Mortgage know!
Pay a Higher Interest Rate and Save Money for a Down Payment
Unless you’re willing to wait to buy a home, you’ll have to pay a higher interest rate if you have bad credit. Once you accept that fact, you need to start saving money for a down payment. Most often, your chances of securing the home increase when you pay a larger down payment for the home upfront. This is because the lender knows that you’re less likely to quit making your mortgage payments due to the money you’ve invested in your home. If you have bad credit and you put down 20%, your chances of being approved for the mortgage loan with bad credit will increase.
Once you secure your home with bad credit, you need to rebuild your credit and increase your credit score. If you want to know where you stand in terms of how much you can afford to put down on a home with bad credit, use our mortgage calculator.