How to Buy a Home with Bad Credit

When it comes to taking out a mortgage and purchasing a home, having good credit can make all the difference in the cost of the down payment, mortgage insurance and interest rates. Though it's easier to buy a home with good credit, it's not impossible to do so with poor, bad, or even no credit. Below is some helpful information on how to get yourself (and your family) into a nice home despite having not-so-nice credit.

First things first, you'll need to know where you stand in the credit rating scale.

Excellent: 720+
Good: 680 - 719
Fair: 620 - 679
Poor: 580 - 619
Bad: 579 and lower

If you have poor credit, bad credit or no credit, the following factors can help you get into a home.

Poor credit & bad credit buyers

Paying down your credit card debt is one of the best ways to improve your score because if you're diligent, you can make a difference in your credit report in as little as a few months. If you are able to completely pay off your card(s), do NOT close them. Cut them up if you want but keep them open because the more unused credit you have available to you, the better your credit report looks and the higher your credit score will be.

If you have any debt in collections, contact them and work out a plan for them to remove the debt from your credit report upon repayment. Paying back a debt in collections does NOT automatically remove the debt from your credit report. However, if you contact them, work out an agreement, AND receive that agreement in writing, your credit score will increase once that debt is paid and removed from your credit report.

Poor credit, bad credit, or no credit buyers

Paying all of your bills on time each month is the easiest way to boost your score and show lenders that they can depend on you to pay your mortgage on time.

Making a large down payment - The larger the down payment, the less of a risk it is for banks to lend you money because you have significant equity invested in the home. A down payment of 20% or more of the purchase price increases the chance that you'll qualify for a loan with decent terms.

Having a low debt-to-income ratio - Lenders look to see how much money you make compared to how much debt you have. A low debt-to-income ratio means you make significantly more than you owe. If you are considered to have “no credit” because you don’t have lines of credit open like a car payment or credit card, some lenders will consider 'alternative' sources of credit such as utility bills, cell phone, gym membership, or rent. Typically, no credit buyers will need at least four of these alternative sources with reported data for a minimum of 1 to 2 years.

Loan Option

One of the best loan options for buyers with poor credit, bad credit, or no credit is an FHA loan which is a loan insured by the Federal Housing Administration. You’ll need a credit score of at least 580 and you’ll have to make a down payment of at least 3.5% of the purchase price. If you’re buying a home for $100,000, you’ll need to put down at least $3,500. High mortgage insurance premiums are the biggest drawback of this loan because they can sometimes last for the life of the loan unless you put down more than 10% of the purchase price (i.e. $10,000 on a $100,000 home).

Mortgage Assistance Program

Freedom First Closing Cost Assistance program for NO FICO CREDIT or LOW FICO Score Buyers. While this program only helps to cover closing costs, and not the down payment, it’s helpful nonetheless because closing costs average from $3000 to $7500. Up to 2% of the loan amount is in the form of a Lender credit that does not require repayment by the borrower and this program can be used anywhere in the State of Florida for Single Family Residence, Townhomes & Condos.

Ultimately, one of the best things you can do is talk to local banks and credit unions because they may have easier loan requirements than larger banks. If you've banked for a long time at a particular financial institution, try asking about its home loan products because they are usually more invested and interested in having their customers bank and borrow in-house.

Don’t lose hope. It’s not impossible to purchase a home with less than great credit. Having a long employment history, high income, or clean payment history over the past year can be of significant help in getting you into a home.