How to Buy a Home With a Low Credit Score

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If you’ve made some mistakes in your financial past, you’ll see the effect of those mistakes displayed in your credit score. Many people with poor to fair credit scores wish to make a large purchase (like a vehicle or house) but are stymied when they realize that their credit history adds a degree of difficulty to the process.

There are many reasons that make buying “better” than renting. Some of them include:

  • No more landlords! You get to make all of the decisions about your property and your home, which naturally does add some responsibility into your life, but you’ll also feel a sense of freedom when you get out from under a landlord, especially if you’ve had a negative renting experience.
  • Homeowner tax deductions!
  • You can go “green.” Renters have no control over making home improvements that will lower utility costs, but as a homeowner you’ll be able to make changes like using solar panels and adding insulation.
  • You can make a home your own. Whether this means extensive renovations or simply changing the wall colors – it’s all up to you when you’re the owner.

If you are dealing with the roadblock of a low to fair credit score but are working with a NJ credit counseling professional to continually bring that number up – you are on the right track to becoming a homeowner.

Admittedly, a credit score that’s below about 580 is going to make it challenging for you to acquire a mortgage loan. Although it will be challenging, it isn’t impossible. Here are some tips that will make it more likely for you to be approved for a home loan in the near future:

  • Get a co-signer. If you’re determined to own a home NOW and your credit score falls into the “low” range (<580), ask a close family member or friend with good credit to sign the mortgage with you. Technically, the loan will then belong to both of you, but you will be the only one making the payments. When your credit score improves, you can have the co-signer removed from the loan.
  • Make a large down payment. The fact that you want to own rather than continue to rent, even with a low credit score, tells us that you have a reliable source of decent income or that you’ve had some kind of financial windfall recently. Either way, making a significant down payment often convinces lenders that sub-prime borrowers are on their way up and are not a lending risk.
  • Apply for an FHA loan. Because this type of loan is backed by the US government, you can (often) qualify for an FHA loan with a credit score in the 500s. You’ll be paying for your low score with required mortgage insurance, but if you can afford it, an FHA loan is a good option. After you pay down your loan a bit, you can petition your lender to remove the insurance.
  • Avoid making any more financial mistakes. For potential borrowers with bad credit, lenders look to see that your score is moving in the right direction. They also want to know whether you’ve missed any rent or utility payments in the last year or two. If your financial stability is super new, you may need to wait to apply for a mortgage until you are able to increase your credit score and/or generally improve your overall financial situation.

Image credit: Mark Moz

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