There are a lot of people interested in home ownership out there. As a result, it isn’t uncommon for people with bad credit to wonder about whether they can buy a new house or not in spite of their financial issues. Unfortunately, a bad credit score tends to put some serious limits on interested individuals’ ability to secure financing, but there might be some options that can prove helpful for them anyways. Here are five potential options for buying a new house with bad credit:
1. Save Up For a Bigger Down Payment
Saving up for a bigger down payment is one of the most critical steps for someone who is seeking to buy a new house with bad credit. This is because making a bigger down payment means needing to borrow less money, which in turn, increases the chance that interested individuals will be able to secure sufficient credit in spite of their bad credit scores. With that said, people who want to buy a new house should be saving up for a bigger down payment anyways. Simply put, the more that they pay upfront, the less that they will have to pay in the end because of reduced interest from a smaller principal on their mortgage.
2. Look Into FHA Loans
People with bad credit might want to look into FHA loans, which are easier to get because they are insured by the FHA. To get a good idea of how much this can matter, consider the fact that people have been known to get FHA loans with credit scores as low as 500 so long as they are willing to make a down payment of 10 percent at the same time. In contrast, most people can expect the minimum credit scores for conventional mortgages to be somewhere between 620 and 680. With that said, interested individuals should know that FHA loans tend to come with some serious downsides. The need for a bigger down payment for people with particularly low credit scores has already been mentioned, but it is important to note that there are others that range from higher costs to limited options.
3. Consider Other Factors of Creditworthiness
The credit score can seem synonymous with creditworthiness. However, this is a mistaken impression because the credit score is actually a convenient approximation for creditworthiness, which is what really matters when lenders are making their lending decisions. As such, when lenders are making lending decisions for more important loans that merit more consideration, it isn’t uncommon for them to look at factors besides the credit score. Due to this, interested individuals might be able to make up for a bad credit score by pointing out high income, low outstanding balances, high cash reserves, and other factors that make them better loan candidates.
4. Private Mortgage
Private mortgages come from private lenders. In other words, this means approaching friends, family members, and other potential candidates with the means to offer such loans. Be warned that private mortgages can cause some serious problems for interested individuals. For example, if such a loan falls through, interested individuals can expect some serious strain on their relationship with the private lender. Likewise, private mortgages can come with very unattractive terms because of the variability of private lenders, though on the bright side, there are times when this can actually work in the borrower’s favor. Still, since choosing a private mortgage renders the credit score a non-issue, this can be the right option for those who know the right people.
5. Fix Your Credit Score
Finally, there is the option for interested individuals to focus on fixing their credit score before getting started on buy a new house. Yes, this will take some time, but it should be mentioned that some of the other options mentioned here will need time to prepare as well. Generally speaking, interested individuals can fix their credit score by making use of credit, making their payments on time, and paying down their outstanding balances as much as possible. However, if they have paid off a credit card, they shouldn’t cancel it because that means losing all of the credit history that has been built up with it. There are a lot of people interested in fixing their credit scores, which in turn, means that there are a lot of sources of information for those who want to pursue a similar course of action.