Buying a Home with Bad Credit

Wondering how to buy a house with bad credit or no credit at all? You may be surprised to learn that the process is pretty straightforward. There are a handful of programs that help borrowers like you get approved for a home loan, getting you closer to earning the prestigious title of homeowner. 

To get approved for a home loan, most lenders require a credit check. This is a complete analysis of your credit history, which summarizes your likelihood to pay back the entire amount of a loan. 

Poor credit is commonly accompanied by financial struggles. A no money down mortgage is enticing to many borrowers who struggle to come up with thousands of dollars out of pocket. Other programs, like the FHA home loan program, approve mortgages with lower down payment options

Having poor credit does not disqualify you from getting approved for a home loan, but there are a few setbacks to keep in mind. For example, lenders are more likely to tack on higher interest rates and fees because of poor credit history. Learn more about buying a home with bad credit and see if it might be right for you.

How to Buy a House with Bad Credit

An FHA home loan is a type of mortgage that is secured by the federal government. The Federal Housing Authority (FHA) created this program to help borrowers purchase a home with low credit scores and minimal down payments. 

To qualify for an FHA home loan, borrowers must have a minimum credit score of 500. Borrowers with scores between 500 and 580 must pay 10 percent as a down payment, while those with scores of 581 or higher qualify for a 3.5 percent down payment. 

Down payment assistance programs are available for some borrowers who qualify. These programs provide funds and incentives to those who may not have the required down payment out of pocket. FHA loans do not offer any zero down payment options, but borrowers can get approved for outside programs that work in relation with the FHA program.

Borrowers with scores less than the FHA-required 500 can still find other options for mortgage programs. Saving up for a larger down payment is one way to counteract the credit score requirement. However, it is important to note that lower scores often mean higher rates.

Low Credit Scores and Mortgage Rates

When it comes to bad credit, loans guaranteed approval are hard to come by. There are far more hoops to jump through for borrowers with less-than-stellar credit scores. Generally, the lower a borrower’s credit score, the higher interest rate they will receive. 

An interest rate is the percentage that a borrower must pay to a lender in exchange for the lender providing funds. Most homebuyers do not have hundreds of thousands of dollars in their pockets to purchase a home outright. Therefore, large-scale lenders like banks and credit unions provide the money and tack on an interest rate.

Understanding how to buy a house with bad credit requires borrowers to understand how interest rates work. Credit determines the borrower’s likelihood to repay a loan. Lower credit means a borrower is less likely to make on-time payments to the lender, so the lender protects its assets by charging more in interest.

Many traditional mortgage lenders will approve borrowers with poor credit, but the interest rate they charge can be double or even triple the national averages. This means the borrower pays much more over the long run than the actual purchase price of the house. Of course, it is possible to refinance in the future after a borrower improves his or her credit. 

Down Payment Assistance Programs

A no money down mortgage is rare, but there are several programs available to help borrowers with this out-of-pocket expense. A down payment is a certain percentage of the mortgage that borrowers are expected to pay up front. Traditional mortgage lenders often require at least 20 percent. 

An FHA home loan, however, requires just 3.5 percent as a down payment for borrowers with credit scores over 580. This is a significant difference, but can still add up to a large expense for many homebuyers.

So, can you buy a house with no money down? The short answer is yes. You may not need to come up with a down payment with programs like USDA home loan. This program, available from the United States Department of Agriculture, allows borrowers to skip out on the down payment altogether in exchange for purchasing a house in a “rural” area.

Other down payment assistance programs are available at the state level, which means that qualifications and award amounts vary across the country. Many states offer programs through finance authorities, providing funds to help with down payments and closing costs.

The National Homebuyers Fund is another down payment assistance program that covers many states across the country. Borrowers must find qualifying lenders to take advantage of this program. The NHF provides up to 5 percent of the loan amount, which means that the total down payment costs associated with an FHA loan would be covered.

Veterans and active-duty military members are eligible for Veterans Administration (VA) loans, which require zero down payment. To qualify for this no money down mortgage, borrowers must meet certain service-related criteria. 

Other local first-time homebuyer down payment grants are widely accessible, but borrowers must know where to look. Certain non-profit organizations help qualifying borrowers with down payment assistance, like Habitat for Humanity and local credit union branches. Borrowers should do some research into these local programs to consider all of the options available to them.