Whether we like it or not, our personal finances have a massive impact on what we can and can’t do in life. Just as you needed good grades to get into a good college, you need a healthy credit score to secure a good loan and get a home you’d be happy to live in. Although having a good credit score certainly helps when you’re first hitting the property market, all is not lost if you have poor credit and want to become a homeowner! Here are three ways to get that home you want even when you have bad credit.
Save for a Larger Down Payment
If your credit score is 580 or lower, a larger down payment is pretty much going to be a necessity, not an option. Still, if your score is just a touch higher, you can save for a higher down payment consensually and compensate for your less-than-perfect credit score. This will generally mean a payment worth 20% of the home’s value or higher. When you’re able to make a large down payment, it assures the lender that you’re able to carry the loan in spite of your weak credit score. You’ll increase your equity in the home from the beginning, immediately showing the lender that you’re less likely to default, and therefore less of a threat.
Get an FHA Loan
When you have poor credit and first start looking around at different home loans, it can be easy to assume that your situation is hopeless. Don’t be so sure! One of the most accessible options for borrowers with poor credit is getting an FHA loan instead. If you weren’t already aware, FHA loans are loans that are backed by the Federal Housing Administration. The terms attached to these loans tend to be far more lenient than the ones owned by private companies, and are aimed at making homes more accessible to people on low and moderate incomes. According to the Department of Housing and Urban Development, most borrowers can be approved for a loan with credit scores as low as 580, provided they have the means to put down 3.5%. While these loans may have higher fees attached, they’re often a very smart move for people with low credit scores who are looking to buy.
Don’t Forget to Talk to Lenders
These days, the large majority of lenders rely on automated systems and formulas to decide whether or not someone is a good loan candidate. However, that doesn’t mean that you’re out of options if that first calculation says you don’t qualify. Despite the systems they have in place, most lenders have the option to do their underwriting manually. This means that they could overlook your poor credit score, provided you can show that you’re financially stable in other ways. For example, on-time rent payments for a year or more, or having significant cash reserves for a minimum of six months. High income and low debt repayments can also show them that you’re pretty low-risk. You should also remember that student or medical debt is nowhere near as damaging as regular consumer debt.
If you thought that you’d never be able to buy a home, I hope this post has given you a little more hope!