Is it possible to get a mortgage with bad credit? The answer is yes, but attempting to do so can pose unnecessary financial hazards. A far more effective plan would be to improve your credit score first and then seek real estate.
Get an FHA Loan
When your credit report is less than stellar, you could try taking out a Federal Housing Administration (FHA) loan, which the government insures. The FHA, by the way, is a division of the U.S. Department of Housing and Urban Development. The requirements for such a loan are relatively lenient. If you’ve experienced a foreclosure or if you’ve filed for bankruptcy, you still might be eligible.
The down payment of an FHA loan amounts to just 3.5 percent of a new home’s total cost. Private lenders often ask for larger down payments, sometimes at rates of 20 percent or more.
FHA loans do have drawbacks, though. To secure one, you’ll need to take out an insurance policy, and its premiums can be more expensive than conventional loan insurance premiums. For an FHA loan, you’ll have to pay an upfront premium as well. A private lender probably wouldn’t require you to make such a payment.
Also, it’s possible that you could obtain an FHA loan only to realize later that you’re unable to make your payments. In the end, it’s better to get rejected for a loan than to get a loan you can’t repay.
Find a Cosigner
Another option is to locate someone who’d be willing to cosign your mortgage. If this person’s finances are sound, he or she should be able to help you procure a lower rate of interest and other favorable terms.
However, this course of action ought to be your last resort. If someone were to cosign your loan, that person would be assuming a major risk. If you failed to make a payment on time or if you were to default, your cosigner’s credit score would be damaged severely.
For that reason, don’t be surprised or offended if those who are close to you decline to cosign. Likewise, if people ever ask you to cosign for them, you should turn them down no matter how much you’d like to be of assistance.
Use Your Negotiating Skills
If you have bad credit, you might still be capable of persuading a lender to grant you a mortgage. Most likely, you’d have to demonstrate that you currently make a lot of money, have substantial savings and aren’t in debt. Furthermore, it may help if you can prove that you’ve paid your rent punctually for the past 12 months or longer.
All of these factors would indicate that you’re financially responsible, and they might convince lenders to overlook your credit score, especially if it dropped due to circumstances beyond your control or because of a one-time mistake that you vow never to repeat.
On the other hand, you might create a financing plan with the person who’s selling the house. That is, you could make a significant down payment and agree in writing to give him or her a certain amount each month. However, many sellers simply have no interest in such deals.
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Whipping That Credit Score Into Shape
Given the serious drawbacks to all of the home financing methods mentioned above, there is only one conclusion to draw here. Before you even start looking for a home to buy, you really should make sure that your credit report is impressive enough.
Different credit reporting agencies have somewhat different credit score ranges. But, roughly speaking, those scores extend from 300 to 850. If you want to take out a conventional home loan, you should have a score of at least 650, and 700 or higher is preferable. Don’t panic if yours is less than 650, however.
Rather, there are a variety of ways in which you could raise that number fairly quickly. For one, you could obtain copies of your credit reports, look for errors that aren’t in your favor and tell the agencies about them. In addition, pay off all of your credit card balances. Likewise, if you haven’t always been doing so, start consistently paying your credit card bills on time and in full.
Moreover, with each of your credit cards, don’t utilize more than 30 percent of your credit line during any given month. In fact, to keep your utilization rate down, you might request higher credit lines if you’re eligible for them.
Finally, an outstanding credit repair service can review your specific financial circumstances and find ingenious and highly efficient techniques for boosting your score.
In the end, the strongest reason to avoid taking out a mortgage with bad credit is that you’d most likely get stuck with an extremely high interest rate. Because of that rate, you’d spend thousands of dollars more over the life of your loan. By contrast, you could invest perhaps a couple hundred dollars in improving your credit score. Consequently, you’ll not only obtain a much more affordable mortgage, but you’ll have the ability to work out many other advantageous financial contracts in the future.