Back before the housing crash of 2008, people with bad credit could easily get a mortgage. The problem was that many people were buying overpriced homes that they really couldn’t afford.
The lending standards are tighter now than they were back then, but it’s still possible for people with bad credit to buy a house. Here are three ways:
1. Show that you’re ready
Even if you are initially denied a mortgage, you might get a lender to change that decision and approve your loan application. Mortgage applications often go through an automated system. If you don’t pass, ask the lender to look through your application manually, explaining that you are ready to take on the mortgage. Here’s what you’ll want to show your lender:
- Be prepared to make a down payment of 20 percent or more.
- Show that you’ve been paying your rent on time for the past 12 months.
- Show that you’ve been paying all your bills on time for the past 12 months.
- Have a savings account that has at least six months worth of mortgage payments in it.
2. Go through the FHA
The Federal Housing Administration has lower lending standards than traditional lenders and requires a down payment of only 3.5 percent. You don’t get a loan directly through the FHA; you get it through FHA-approved lenders. The catch is that you’re required to pay for mortgage insurance for as long as you have the loan, and you pay an upfront fee of 1.75 percent of the loan amount when you get the loan. This fee gets added to your total loan amount. Here’s a breakdown of some FHA facts:
- People with scores lower than 500 typically cannot get an FHA mortgage.
- If your score is between 500 and 579, you need a down payment of 10 percent.
- You need a credit score of 580 or above to qualify for the 3.5 percent down payment feature.
- You might qualify for a grant from your state or local jurisdiction to help you with the down payment or closing costs. Here is a good place to check to see whether you would qualify.
3. Buy through seller financing
If you’re renting a house and would like to buy it, ask your landlord if he or she would be willing to sell the house to you through a selling financing arrangement. Your landlord is under no obligation to do this. But, if your landlord is interested, here’s how seller financing works:
- The seller is also your lender.
- You typically sign a promissory note.
- You make monthly payments just as before, only the payments are going toward buying the house.
- Most seller financing arrangements are for a short period of five years or so. At the end the seller-financing period, you would be expected to pay off the balance. The theory is that you’ll be able to obtain a traditional mortgage in five years from a traditional mortgage lender.
Tip: raise your credit score
Credit scores range from 300 to 850—the higher yours is the better. If your credit score is in the low 600s, you can usually get a mortgage, but you will pay more in interest than someone with a high score of 740 and above.
If your score is below 550, you might not qualify for a mortgage, so you’ll need to raise your credit score. Do this by paying all your bills on time, and get your credit cards paid down so you are using no more than about 30 percent of your available credit. Your credit should improve over time. Once it does, you can apply for a mortgage.
Although you can’t erase true information from your credit report, the bad stuff comes off after seven years. You can, however, get the credit bureaus to remove false information. Look over your credit report and ask the bureau to fix any errors that might be there. That could give your score an immediate boost.