Overview: How to Buy a Home with Bad Credit
Real estate experts claim that now is an excellent time to purchase a house. With mortgage rates at all-time lows, it’s a great time to think seriously about becoming a homeowner.
But what about first-time home buyers with bad credit? If you’re a first-time home buyer with bad credit, you may have low credit for any number of reasons: student loans that keep piling up, a period of unemployment where you had to rely on credit cards, forgetting to pay your bills on time, or maybe you just haven’t had a chance to build your credit yet.
The good news is that if you’re a first-time home buyer with bad credit, you’re not alone. The average American family has more than $15,000 in credit card debt, and 25% of Americans have under $100 in their emergency savings, according to Trulia.
The bad news is that your credit is a huge part of what determines your eligibility for a mortgage, and it can be difficult to find a good mortgage if you have bad credit. First-time home buyers in this situation are probably wondering how to buy a home with bad credit.
This post will walk you through what your credit score means, what the leading causes of bad credit are, and what you can do to improve your credit if you’re a first-time home buyer with bad credit.
Finally, it will guide you through how to buy a home with bad credit and will highlight some useful resources for first-time home buyers with bad credit. Ultimately, this article will show you that just because you have bad credit, first-time home buyer loans are still available to you.
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What Is a Credit Score?
Your credit score is a number between 300 and 850 that reflects your credit history. Lenders rely on this tool to determine how likely you will be to default on a loan. Understanding how credit scores work is crucial in learning how to buy a home with bad credit.
While having a good credit score does not guarantee that you will qualify for the mortgage you’re applying for, it definitely puts you in a better position than a first-time home buyer with bad credit. That being said, there are a number of bad credit home loans for first-time buyers, which this post will walk you through in a later section.
Image Source: First-Time Home Buyer with Bad Credit
So now that you understand the gist of what a credit score is, you’re probably wondering exactly what factors go into calculating your score. The answer is: it’s complicated. But it’s important for a first-time home buyer with bad credit to understand how this works, so let’s break it down.
Here are the factors that determine your credit score, according to Bankrate, which a first-time home buyer with bad credit should pay careful attention to:
- Payment history (35%): This is a history of all your accounts and payments, including delinquencies. Understanding how payment history works is key to learning how to buy a home with bad credit.
- Amounts owed (30%): This refers to the amount that you currently owe on your accounts and how much available credit you have. This is heavily weighted when lenders consider first-time home buyer loans with bad credit.
- Length of credit history (15%): This element deals with how long your accounts have been open. Sometimes having bad credit is due to not having many accounts open or having only opened an account recently. This is a common issue for a first-time home buyer with bad credit.
- New credit (10%): This refers to how many new credit accounts you have opened or attempted to open recently. While it’s good to have a strong credit history, it is paradoxically bad to have multiple new credit accounts open at the same time. This is a common cause of bad credit for first-time home buyers.
- Types of credit used (10%): This deals with the different forms of credit you have (e.g., credit cards, student loans, car loans, mortgages, and retail accounts). If you are a first-time home buyer with bad credit, diversifying your credit is a good idea.
Note that it is important for a first-time home buyer with bad credit who is looking into how to buy a home with bad credit to understand not only which factors contribute to their credit score, but how much weight each factor carries.
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What Causes Bad Credit?
The previous section looked at the different factors that your credit score is based on and how much each specific factor is weighted in calculating your overall score.
But now it’s time to take a deeper look at the reasons people wind up having low credit scores. If you are a first-time home buyer with bad credit, you are likely wondering how you got into this situation of having bad credit in the first place.
Payment history is the single most important factor in determining your credit score and can put many people in the position of having to look for a first-time home buyer loan with bad credit. According to Equifax, if you are even 30 days late on a bill, this can cause your credit score to drop by 90 to 110 points, even if you’ve always have excellent credit until that point.
But although it’s the most significant issue, payment history isn’t the only factor that matters in calculating your credit history. Many people searching for a first-time home buyer loan with bad credit don’t realize that paying bills on time is only one component factoring credit score.
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“I don’t get it—I’ve never been late on a payment in my life!” you may be thinking, if you have bad credit and are searching for first-time home buyer programs with bad credit.
That may be true, but being on time with payments is just part of what can lead to a good credit score. Maybe you’re a first-time home buyer with bad credit who always pays your bills on time, but you only opened your first credit account few months ago, or maybe you recently opened up multiple new accounts.
The first would give you a low score in “length of credit history” and the second would damage your score for “new credit.” People looking for first-time home buyer programs with bad credit often score badly in both of these areas.
Another factor that affects credit and is important to understand for people researching how to buy a home with bad credit is amounts owed. Trulia defines this factor as “how much debt you’ve accumulated on your credit cards divided by the credit limit on the sum of your accounts” and advises sticking with a ratio of roughly 30%.
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How Can You Improve Your Credit?
Now that you understand the problems that can cause you to have bad credit, it’s time to look at some practical steps you can take as a first-time home buyer with bad credit to improve your credit. Finding ways to improve your credit is the first step in learning how to buy a home with bad credit.
Your ability to secure a mortage doesn’t have to be limited just because you have bad credit. Home loans for a first-time buyer are accessible to people with varying credit scores. By following these simple instructions, you can boost your credit score without making significant lifestyle changes.
Here are some steps you should take as a first-time home buyer with bad credit to improve your credit score:
- Review your credit score and familiarize yourself with the different components. Many sites offer free credit reports. Understanding your credit score is a crucial step in learning how to buy a hosue with bad credit.
- Create payment reminders for yourself. If you’re a first-time home buyer with bad credit who tends to forget payment deadlines, this is an excellent tip.
- Keep old accounts active. Even if you are no longer using an old credit card, it’s better for first-time home buyers with bad credit to leave the old account open than to close it, as doing so will improve your length of credit history.
- Pay off your debt instead of transferring it around. Paying down your existing credit card debt can play a huge role in improving your credit score.
How to Buy a Home with Bad Credit: A Guide
As discussed, the best thing you can do as a first-time home buyer with bad credit is to try to boost your credit score. But there’s only so much you can do to improve your credit.
That said, don’t lose hope if you have bad credit. Home loans for first-time buyers are available in all shapes and sizes, and this section will explain how you can find one that will work for you.
Once you’ve done all you can to improve your credit score, it’s time to look at specific resources that are available to you as a first-time home buyer with bad credit. By taking advantage of these resources, you can quickly learn how to buy a home with bad credit.
Image Source: How to Buy a Home with Bad Credit
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Here are a few things you can do to secure first-time home buyer loans with bad credit:
- Wait until you can save enough for a larger down payment. If you are a first-time home buyer with bad credit whose credit score is less than 580, you will likely need to save more than the recommended 20% of the home value. Doing so will help balance your bad credit and may improve your eligibility for a first-time home buyer loan with bad credit.
- Find an FHA loan. FHA loans have the backing of the Federal Housing Authority and are often available as first-time home buyer loans with bad credit. They are more accessible to first-time home buyers with bad credit than lenders like Fannie Mae and Freddie Mac. Pay close attention to the fine print, though, as they may come with higher fees attached.
- Know your strengths and explain them to lenders. While a lender may automatically refuse to grant you a first-time home buyer loan with bad credit due to your credit score, by talking to them in person, you may be able to change their mind. Emphasize things like punctual rent payments, cash reserves of six months or more, and burdens from student loans.
- Consider a private mortgage. Although most people choose large financial institutions to finance their mortgages, private mortages through a family member, friend, or other private lender can be a great alternative for a first-time home buyer with bad credit.
Bottom Line: Homeownership Is Achievable for People With Bad Credit
If you are like many first-time home buyers with bad credit, you may begin your house hunt feeling like homeownership is unachievable due to your bad credit. A first-time home buyer who has low credit can take a number of different steps to improve their credit, while also accessing first-time home buyer programs with bad credit.
This post explained what your credit score means, the factors that go into calculating the score, and the reasons why your credit score may be low. The article then walked you through things you can do as a first-time home buyer with bad credit to improve your credit score.
Finally, the post provided a guide for how to buy a home with bad credit. Don’t lose hope just because you have bad credit. Home loans for first-time buyers are available to you, and by taking steps like saving for a larger down payment, looking for an FHA loan, or considering a private loan, you’ll be well on your way to financing the home of your dreams!
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