How to Buy a House with Bad Credit
- UpdatedSep 22, 2024
- It's harder to buy a house with bad credit, but It's also possible.
- FHA home loans require just 3.5% down, but borrowers with lower credit scores have to put 10% down.
- Paying your mortgage on-time every month can help raise your credit score.
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You’re ready to make one of the biggest financial investments of your life. There’s just one problem–you have bad credit. Well, you’re not alone. In fact, almost 20 percent of Americans have a subprime credit score.
The good news is, buying a house under these conditions is possible. If you’re wondering how to buy a house with bad credit, consider these tips.
1. Check your credit report for errors
Did you know that you could be having trouble buying a house because you have errors in your credit report? While payment history, length of credit history, diversified credit, and new credit all affect your score, mistakes, or even identify theft, can also be taking a toll.
The best way to get to the bottom of these issues is to get your free credit report, which you’re entitled to once every 12 months. With your report in hand, it’s time to dig in to search for mistakes, which could include:
Incorrect personal information, like wrong address or middle initial
Accounts not belonging to you
Closed accounts that are still being reported as open
Mistaken duplicate accounts
Misrepresented payment history
Outdated credit or balance information
To fix any mistakes, call both the credit bureau from which you ordered the report as well as the institution that the error is connected to—both are required to address and fix the issue. If these errors are the reason you have bad credit, it may be easier to buy a home once they are cleared from your credit report.
Find Out How to Improve Your Credit.
2. Research willing lenders
Not all lenders will work with you if you have bad credit. Or, even if they do agree to work with you, they may only offer you high interest rates. That’s why it’s important to do your research to find lenders willing to work with borrowers who are trying to figure out how to buy a house with bad credit.
Start by comparing mortgage offers online, looking for the lender that will offer you the best rate based on your credit score. One option to consider is an FHA loan, which has a lower down payment and credit requirement than other conventional loans. In fact, borrowers with credit scores as low as 580 could qualify for an FHA loan. Most private lenders are FHA-approved, so all you have to do to get started is ask whether the lender you like provides FHA loans.
3. Make sure you have enough money saved
FHA loans require just a 3.5 percent down payment, but other lenders may require a much higher down payment for homebuyers with bad credit. This is why it’s important to have money saved before you start looking. If you don’t have the down payment money, you probably won’t be able to move ahead with the home you love.
If you’re struggling to save for your down payment, you can look for payment assistance via grants from the U.S. Department of Homes and Urban Development (HUD). HUD provides funds to each state, which then gives the funds to residents in need. Before you can get any support from a HUD grant, however, you do need to be approved for a mortgage and take a HUD-approved Housing Counseling class.
Another option is a shared equity mortgage. This means that you and your lender share ownership of your home. When the home is sold, each party gets their share of the equity, based on each contribution.
4. Pre-qualify and make an offer
Bad credit or not, you need to go through the process of being pre-qualified with your lender of choice. Luckily, this process–which requires you to speak with a lending officer–is quick and free. The point is for you to shed light on your financial situation to get an idea of how much house you can afford. If you’re dealing with bad credit, you may discuss your credit situation with your lender at this time.
Once you’ve been pre-qualified and found a home that’s within your budget, you can make an offer. If that offer is accepted, you’ll schedule an inspection to make sure there aren’t any hidden issues, like a cracked foundation, that would make it a bad investment.
5. Sign the papers and improve your credit
Once your loan is processed, all that’s left to do is to sign the paperwork. With the final step taken, you’ll get the keys and can officially call yourself a homeowner. However, if you do buy a home with a low credit score, it’s critical that you keep up on your monthly payments. This will help improve your score and ensure that you stay in good standing with your lender. When your credit improves, you can also consider refinancing to get a better mortgage rate.
While the process may seem daunting, there are options for all those wondering how to buy a house with bad credit. Find and use the resources that are available to you and you’ll be a homeowner before you know it.
Need help getting your financial house in order?
Whether you’re home-buying dreams are a short-term or long-term goal, you need to get your finances in order. Luckily, learning how to deal with debt, money, and planning for your future doesn’t need to be hard. To help, we’ve developed a simple to follow guide to give you the tools you need to move to a better financial future. Get started by downloading our free guide right now.
Learn More
5 Home Buying Mistakes to Avoid (Freedom Debt Relief)
To Rent or Buy? Making a Smart Real Estate Decision (Forbes)
A look into the world of debt relief seekers
We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during August 2024. This data highlights the wide range of individuals turning to debt relief.
FICO scores and enrolled debt
Curious about the credit scores of those in debt relief? In August 2024, the average FICO score for people enrolling in a debt settlement program was 583, with an average enrolled debt of $24,249. For different age groups, the FICO scores varied. For instance, those aged 51-65 had an average FICO score of 588 and an enrolled debt of $25,402. The 18-25 age group had an average FICO score of 548 and an enrolled debt of $14,432. No matter your age or debt level, it's reassuring to know you're not alone. Taking the step to seek help can lead you towards a brighter financial future.
Credit card debt - average debt by selected states.
According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average credit card debt for those with a balance was $6,021. The percentage of families with credit card debt was 45%. (Note: It used 2022 data).
Unsurprisingly, the level of credit card debt among those seeking debt relief was much higher. According to August 2024 data, 89% of the debt relief seekers had a credit card balance. The average credit card balance was 15659.
Here's a quick look at the top five states based on average credit card balance.
| State | Average credit card balance | Average # of open credit card tradelines | Average credit limit | Average Credit Utilization |
|---|---|---|---|---|
| Connecticut | $18,817 | 9 | $28,218 | 75% |
| Arkansas | $18,773 | 7 | $24,237 | 96% |
| New Jersey | $18,372 | 9 | $26,611 | 79% |
| New Hampshire | $18,255 | 8 | $25,170 | 81% |
| Massachussettes | $17,942 | 8 | $25,538 | 77% |
The statistics are based on all debt relief seekers with a credit card balance over $0.
Are you starting to navigate your finances? Or planning for your retirement? These insights can help you make informed choices. They can help you work toward financial stability and security.
Regain Financial Freedom
Seeking debt relief can be the first step toward financial freedom. Are you struggling with debt? Explore options for debt relief to regain control of your finances. It doesn't matter how old you are or what your FICO score or credit utilization is. Take the first step towards a brighter financial future today.
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