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Owning a home is a dream for many, but if you have bad credit, you may worry that it’s out of reach. The good news is that homeownership is still possible, even with less-than-perfect credit. While there are challenges to overcome, the right strategies and resources can pave the way to achieving your goal. Here’s what you need to know and how to take the first steps toward buying a home.
What Does “Bad Credit” Mean?
Your credit score plays a significant role when applying for a mortgage. It gives lenders a snapshot of your financial behavior and ability to manage debt.
A FICO score, the most commonly used type, ranges from 300 to 850. Here’s a general breakdown:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
If your credit score is below 580, it’s generally classified as “bad” or “poor.” This score could result from missed payments, defaulted loans, high credit card balances, or negative items like foreclosures or bankruptcies on your credit report.
Having a low credit score doesn’t mean you’re completely barred from buying a home—it just means your options might look a little different.
Check your Credit Score
Checking your credit score is a straightforward process. Each nationwide credit reporting company, Equifax, Experian, and TransUnion, is required to provide you with a free copy of your credit report, at your request, once every 12 months.
Along with this, check for errors in your credit report. If you find an error, the best way to attempt a correction is through a dispute letter. Dispute letters allow you to request a fix by contacting the reporting agency. Although it may take some time to rectify the errors, cleaning up these mistakes can have a direct and favorable impact on your credit score, helping you secure lower interest rates and better terms.
Larger Down Payment
Obtaining down payment assistance can be challenging with a poor credit score. You’ll have to help your odds of pre-approval by proving you have 10% down to put on your home. That 10% is beneficial if your credit score is sub-550. Above 550, you may be able to land an FHA loan with only 3.5% in equity.
Need help saving for a down payment? Here are some tips for conquering saving for a down payment:
- Find out where your money goes and adjust what are “needs” versus “wants.”
- Get specific about how much you need to create a visible goal.
- Identify the significant steps you can take to transform your financial situation.
- Set up a separate savings account, so your down payment is out of sight and out of mind.
- Pretend you already have a house payment by placing that amount in savings each month.
Make Moves to Rebuild Your Credit
You don’t have to be perfect to improve your access to better mortgage terms. First, pay down your credit card balances. Then, identify any outstanding debts or collections that you can manage to clear through full payment or a negotiated settlement. Focus on doing what you can to bring your debt-to-income ratio below 45%. If you push your rating above 620, you’ll not only get closer to better terms, but you’ll generally experience less scrutiny during the approval process.
Don’t Force It
Suppose you’ve experienced a bankruptcy, foreclosure, or short sale scenario. In that case, it may not be possible for you to secure a mortgage for at least three years (sometimes two, depending on the situation). Use this time to work on the tips above!
Encouragement for Aspiring Homebuyers
It’s easy to feel disheartened by the challenges of buying a home with bad credit, but don’t give up. Here’s why:
- Your Credit Isn’t Permanent: Credit scores change over time. By committing to improving your finances, you can create better opportunities for yourself.
- Programs Exist to Help You: Between FHA, VA, and other loan options, there’s likely a solution that fits your needs and circumstances.
- You’re Not Alone: Many people have faced—and overcome—similar obstacles to achieve their homeownership goals.
Remember, the key is patience, persistence, and preparation. Even with bad credit, there’s a path to making your dream a reality.
Taking the Next Step
If you’re ready to start your homebuying journey, here are a few actionable steps:
- Review your credit report and address any issues.
- Create a plan to improve your credit score over time.
- Research loan programs and consult with several lenders to explore your options.
- Consider working with a housing counselor or financial advisor for guidance.
While the process may take time, every little step gets you closer to the finish line. With patience and determination, you can unlock the door to your new home, even with bad credit.
If you’d like to start searching for your next home, I’m happy to help guide you. Mary Tarrant 928-277-6404
