Before diving into this article, I’d like to invite you to my Home Buyer Boot Camp, where we discuss this topic and others – all critical topics to be familiar with before you decide to consider a home purchase or venture out to open houses!
Buying a home with bad credit is possible, but it’ll be more expensive for someone with a bad credit history compared to someone with good credit. Regardless of your credit score you need to be honest with yourself about what you can and can’t afford. Remember – the magic number is what you’re comfortable paying monthly. Here are a few things to consider if you’re thinking about buying a home and your credit score isn’t perfect:
Is Now The Time?
First, scrutinize your finances to see if you can support buying a home. Homeownership is touted as a great way to build financial stability, but it’s also one of the fastest ways you can find yourself sinking money into your “asset.” If you’re someone with bad credit, then it’s possible you may already be struggling with your finances. It’s also possible that owning a house will only complicate your finances further.
Buying a home may not make economic sense, since you’re looking at not only the costs of the house itself, but property taxes, repairs, maintenance, insurance, and other fees. It may be better for you to rent instead, especially if you live in an area with high housing costs.
You also need to think about where you might be in a few years’ time. As we say in the Buyer Boot Camp, you should have an exit strategy planned – are you planning to stay in your area? Is your career stable? Some advisors recommend that people under 40 not jump into homeownership, as the unstable economy means that people need to be mobile for their jobs.
Make A Large Down Payment
What if you really do want to buy a house, though, and are concerned that the bad credit score will make it impossible? One thing you could do is to ensure you have a large down payment ready to go. The common rule of thumb with buying a home is to have a down payment of 20%. If you can make a larger down payment, it’ll make your application more attractive to lenders, since they won’t have to lend you as much money and they’ll know you are very committed to keeping the terms of the loan agreement – thereby reducing their risk. It’ll also eliminate your need to pay private mortgage insurance.
Tackle Your Debt Another thing you can do is start improving your credit score and getting your finances on track. When you’re buying a home, lenders will examine your finances to see if you can afford it and if you’re a good credit risk. That includes looking over your debt. Because of new regulations, you can only have a debt-to-income ratio of a certain percent, and that includes the mortgage itself. Got student loans, credit card debt, or car payments? This is a good time to start paying that off, because it’ll make it that much easier to get approval for a mortgage.
When you’re talking to lenders, you’ll want to document your previous financial history. For instance, perhaps you have made poor financial decisions in the past, but your job is stable and you are earning a good salary. You can start making payments on your debt and that will help make your case as your score improves.
The FHA Loan Option
One popular route to home ownership is to apply for a U.S. Federal Housing Administration (FHA) Loan. It’s one of the easiest loans to qualify for and there are resources for first time homebuyers. Your down payment can be as low as 3.5% of your costs. There are down sides to an FHA loan though – you do need to assume the costs of two different kinds of insurance premiums, since the FHA loans are structured differently from more traditional loans, and the number of FHA approved complexes and homes are lower in San Diego County.
Finally, work on building your credit first, and then buy your house. Even if your dream house on the market right now, you’ll find another dream house when you’re more financially stable. It’ll be worth waiting for when you can buy a house with good credit, and you’ll have peace of mind when it comes to your finances.
Learn more about the ins and outs – sign up for my first time Buyer Boot Camp.