How to Buy a House With Bad Credit

“The Big Short” is a movie about the 2008 economic collapse which was sparked by a super unstable housing market. In it, Ryan Gosling narrates how banks irresponsibly and haphazardly gave out loans to people who definitely shouldn’t have been qualified to buy houses. Mortgage bankers didn’t bother making sure buyers would be able to pay their mortgages because at the time, those bankers made a lot of money selling property to pretty much whomever.

I probably boiled down the housing bubble a little too drastically, but the point is that “The Big Short” taught me that it would never be remotely easy to buy a home post-Great Recession. 

In order to buy a house, all the money stars must align. You need to have cash saved up, for starters. Like, a lot of it. You need to prove that you’ll be able to pay a mortgage every month, so that means proof of income.

During the process of purchasing a home, you’ll have to send over literally every and any kind of financial paperwork you have, including your bank statements, tax returns, any kind of debts you have, along with all your savings accounts, including 401ks. Your loan officer must know you are financially fit to buy a house to even get pre-approved to do so, which makes sense.

You’re most likely going to be borrowing hundreds of thousands of dollars from a lender, and they’ll need to know you’ll pay them back (going back to “The Big Short”, nobody wants 2008 to happen all over again). But what if you have bad credit?

A bad credit score isn’t so difficult to get. A few missed credit card payments, and your score will easily get scuffed up (missed payments stay on your credit up to seven years), and it could remain that way for awhile, especially if you have a significant amount of debt, or a high amount of credit inquiries. 

What’s a bad credit score exactly? 300-629 is considered “bad,” 630-689 is “fair,” 690-719 is “good,” and 720-850 is “excellent.” So, what exactly do you if you’re in the “bad” range? 

What credit score do you need to buy a home in 2019?

While it depends on the market and what kind of loan you take out, you need to have a credit score of at least 580 (in order to take out an FHA loan—more on this in a bit). If you’re looking to take out a conventional loan, then you’ll need a credit score of at least 620.

If you have your sights set on buying a house, how badly can bad credit hurt you?

According to real estate experts, it depends on your situation. Bad credit certainly won’t make it easier to buy a house, but it’s not always a deal-breaker either.

Louis Adler, co-founder of REAL New York, advises that even with bad credit, you can show the lender you’re serious. Adler tells Apartment Therapy, “When dealing with trying to purchase a home with bad credit, the first thing I would advise is to start saving for a down payment, as this shows lenders you’re serious about buying a house.”

He adds, “If you have a bad credit score, you probably need to come up with a larger down payment, as it could help you get a better mortgage rate.” 

However, a lower credit score means you’ll most likely pay a higher interest rate on your mortgage. Beatrice de Jong, Consumer Trends Expert at Opendoor, tells Apartment Therapy that, “It’s important to know that having to pay a higher interest rate will mean your monthly mortgage bill is higher. This may mean that ultimately, you’ll qualify to afford less than someone with a lower interest rate does.”

Can you buy a house with bad credit and 20 percent down payment? 

Lenders will typically want a 20 percent down payment no matter what your credit score looks like—if you can come up more than 20 percent, the odds will be more in your favor. Broker Bill Kowalczuk at Warburg Realty says, “The more money you’re willing to put down, the greater the possibility of obtaining that loan. With more money down, the lender knows you are less likely to walk away because you have a larger stake in the property.”

Depending on the loan, you might be able to pull off buying a house with bad credit and 20 percent down payment—but you’ll most likely have to pay a higher interest rate. 

Is buying a house with bad credit and no money down possible? 

The short answer? It’s most likely not possible to purchase home with bad credit and no money down. Kowalczuk reports, “Buying a home with bad credit and no money down would not be possible today. The 2008 financial/housing crisis is long gone and lender are not keen on going back there.”

How do you buy a house with bad credit but good income?

A high-paying job doesn’t mean a lender will turn a blind eye to your credit score. But it does mean that you can work on your credit score a bit faster. Adler states, “If you have bad credit but good income, it’s best to begin rebuilding your credit, which means paying all your bills on time and paying down any debt. This will provide a more positive credit history for you.”

It also means you could potentially save up to put down more than the standard 20 percent, therefore giving the lender more proof you’ll most likely be diligent about your mortgage payments.

Can you get a home loan with a 500 credit score? What if you got an FHA loan?

An FHA (Federal Housing Administration) loan is the best program for those with bad credit. This is a mortgage backed and insured by the government. A lot of first-time homebuyers take out FHA loans since many are unable to offer a 20 percent down payment. With an FHA loan, potential homebuyers can borrow up to 96.5 percent of the value of home, making it possible for the buyer to only put down 3.5 percent.

The lowest credit score you can have to qualify for an FHA loan is 500—but you won’t get the same kind of low down payment benefit that borrowers with higher credit scores do. You’ll need a credit score of at least 580 in order to only put down 3.5 percent. With a credit score between 500-579, you’ll still need to come up with a 10 percent down payment.

Obviously there’s no such thing as a free lunch (thanks, high school economics class): If you take out an FHA loan, you have to pay a mortgage insurance premium, which as of 2019 is 1.75 percent of the loan amount. 

The best advice for first-time homebuyers with bad credit

If you’re a first-time homebuyer with bad credit, the best route you can take is looking into an FHA loan, which is designed for first-time buyers, people who aren’t able to do a 20 percent down payment, and those with bad credit scores.

But as stated above, you’ll need (at the very minimum) a 500 credit score to get any FHA loan benefits. But if you’re a first-time homebuyer with bad credit and a high-paying job, you may want to look into either fixing your credit score, or putting down a higher down payment—if you can.

What is the Hope program?

The Hope for Homeowners program was a kind of refinancing program that was designed to help keep qualified homeowners from being unable to pay their mortgages. It came about after the 2008 housing crisis and was meant to help people from losing their homes, and it ended in 2011.

According to FHA.com, the Hope for Homeowners program was a refinancing program for those who were eligible to do so. Instead of being forced to foreclose on their homes, homeowners were able to refinance their homes so that they could pay affordable, fixed-rate mortgages.

You were eligible if your mortgage was dated on or before January 1, 2008, you didn’t default on your loan on purpose, you didn’t have multiple loans on houses, and you hadn’t committed fraud.

When you signed up for Hope for Homeowners, you also signed up for an equity sharing program (equity is what’s left between the amount of the loan you originally took out on your home, and the value of it). According to FHA.com, if you ended up selling or refinancing your home, you would have to share any equity with the FHA. The longer you waited to sell or refinance, the less equity the government got.

Can you buy a house with bad credit with a cosigner?

If you have bad credit and are able to find a co-signer for your home loan, this might help if both of you have  good salaries, according to Kowalczuk. However, this does mean that if you’re unable to pay your mortgage, then the co-signer would be the one responsible for it.

“While it’s possible to add a co-signer to your mortgage, it’s a huge ask of someone as they’ll be on the hook for payments if you’re unable to make them,” De Jong tells Apartment Therapy.

At the end of the day, it’s not impossible to buy a home with bad credit—even post-housing crisis. While it’s definitely advisable (and advantageous in the long run) to try and work on your credit score before looking into buying a house, you still have options if that’s just not possible.

Even with a good credit score, you’ll still need to jump through seemingly endless hoops during the home-buying process in order to even get qualified—but ultimately, that’s a good thing! Since the 2008 recession, lenders are far more careful who they give loans to, which makes it way less likely for us to experience another economic collapse. Now, just pretend Ryan Gosling narrated this entire article to you. 

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