How to Buy a House With Bad Credit?

Life is a lot easier with good credit. Banks lend you money, lenders offer better rates, and you qualify for many programs.

But what if that’s not you? Does it mean you’re cursed financially for years? That doesn’t have to be the reality.

There are obvious benefits of having a high score. But a bad one should neither close you to opportunities. As soon as you start treating money the right way, you can start getting loans, buying houses, and everything you need.

And you can make it happen fast. Even better, for FREE.

That’s what this article is about.

How Bad Is Bad Credit?

How Bad Is Bad Credit

Financial institutions have this weird habit. They lend lots of money to people who don’t need it. But they don’t want to give a single dollar to those who need it the most.

That’s the catch 22. More money would fix your debt, but you need to fix your debt to borrow.

And this doesn’t mean you don’t have options. But the cost is so high that it may not be worth it.

People with bad credit have two immediate options: settle for worse offers or spend years fixing that score. None of them is ideal.

Especially when you plan to make a big purchase. Buying a house.

But wait, you can get a mortgage without overpaying your lender. Sometimes, they don’t even consider your credit score.

Let’s see how you can get that home. And by the end, you’ll find a simple plan to rebuild your credit within 2-6 months. You DON’T need to wait until then to buy the house.

What You Should Know Before The Big Purchase

What You Should Know Before The Big Purchase

Most people choose to wait for their score to improve. Otherwise, it defeats its purpose, which is to make bigger purchases easy to afford.

Understand that your credit score isn’t the real reason you can’t finance the house. Poor credit score comes as a result of other problems.

If you’re under 600, it may mean you have outstanding debt. Do you think it’s a good idea to get the home, only to pay even more? That would worsen your debt.

Unless that’s desirable, you might want to fix those late payments first. NOT to fix your credit score, but to have money left for the house.

And before we start, know you have two options if you don’t like having bad credit:

  • The seller will not consider your credit score if you pay 100% of the house in cash. But chances are you don’t have that kind of money when your credit score is so low.
  • Option no.2 is erasing your credit score. So if you consider yours terrible, you might want to get rid of it. It’s much easier to go from bad to zero to good than going from bad to good.

Although it’s not always possible, you can pay a fee (<10% of all your debt) to delete your credit report and start over. This doesn’t mean your debt is forgiven. But it won’t appear in your new credit report. Which is a lot faster than waiting seven years to clear it.

Now that you know your alternatives, let’s see what mortgage options we have.

What Loans Can I Still Apply For?

What Loans Can I Still Apply For

These are the loans you can request and their credit requirements:

Conventional Loans

Yes, you can still get a traditional mortgage, although each lender may have different score requirements. It’s common to ask for a minimum of 620-640 to qualify. Others may accept less than that at the cost of higher interest rates.

VA Loans

If you’re VA eligible, you can still get great rates with low credit requirements.

The average VA loan is 30 years of payments at ~3% interest. Although it requires a fee, this loan allows a 0% down payment. Which makes it great even for broke buyers with decent monthly income.

According to Veteran Affairs, you qualify if:

  • You’re currently active duty military, or you’re a veteran, honorably discharged.
  • You did at least 90 consecutive days of active service during wartime or at least 181 consecutive days of active service during peacetime

Not everybody will qualify for this one. So your second best choice is…

USDA Loans

Let’s talk of USDA eligibility first:

  • Your annual household income shouldn’t exceed $86,850 except for certain high-cost areas, where the limit is $212,550 instead

When borrowing from USDA, it’s recommended a credit score of 640 or higher. But don’t worry, because the minimum required is as low as 500.

The great news is, you neither need a down payment in this one. But if you do want to do it, you get better interest rates (the average is 3%). Like VA loans, there’s a fee to get the money: 1% of the loan amount.

FHA Loans

The main features are:

  • Low down payments + low rates
  • High debt-to-income ratio allowed
  • No income limits to qualify

It’s not very different from the USDA and VA: 3% interest, low down payments. The only difference is:

  • You pay 3.5% upfront with a score of 580 or higher
  • If it’s 500-580, you make a 10% down payment instead

If you’d like to know about the different mortgage types, we’ve created an in-depth guide here.

5 Quick Fixes To Get The Home

Quick Fixes To Get The Home

Fixing your credit score isn’t the fastest way to get the house you want. You won’t get the best deal without it, but there’s still another five ways to get the deal fast.

#1 “Borrow” someone else’s credit score

The shortcut here is to know someone who trusts you enough. When you’re looking to borrow money, it’s much better to start with friends and family, not financial institutions.

If you know that person, you’re going to ask them to apply for the loan for you. It’s not about cosigning, but writing everything under their name. And because their credit score is better than yours, they are more likely to get approved.

So once you get the mortgage, you pay for it every month as if it were yours. It’s just signed under another person.

Mind that there must be real trust and responsibility. This person is trusting you with their credit score. So you better not miss any payments, or you’ll sink their credit score too.

Not everybody knows this kind of person. Maybe those who do trust you have their own money issues. So what can you do instead?

#2 Pay more for the house

Use common knowledge: larger down payments minimize interest rates. Everything you pay right now will make the task much lighter over the months.

Consider waiting until you can afford, at least, 3.5%, maybe 10%. When you don’t have a high score, money is the only tool you have left.

#3 Delay other debt

You might want to make the down payment. But how are you going to save when all your money goes for paying other debts?

Well, if you’re reading this, you probably have bad credit already. So even if you miss those payments, the thing isn’t going to get much worse anyway.

If your priority is to save up for the house. You might want to stop paying and saving that cash instead. Once you make the down payment and start with the monthly payments, you can resume your debt recovery plan.

Think twice before deciding on this risky strategy. I’d ask the lender first. Is there any way I can delay this payment until the next month and not hurt my score? Maybe you can negotiate to pay nothing this month, then twice the amount on the next one plus 2-5%.

#4 Increase your income

Let’s say you don’t have time to fix your score, but you’re willing to pay more for the home. If you can’t buy it yet, the fastest way to afford it is to make more money.

Fast money allows for a bigger down payment. It also helps you get rid of that annoying debt. It’s much faster than building credit.

But hey, it’s not as hard as you think. Even for $0, it’s easy to rack up hundreds of dollars fast if you check out our guides:

Here’s an extra benefit. If you prove you can make money fast, it’s a lot easier for private lenders to trust you.

#5 Lease your home

If your credit is 600 or higher, leasing is the cheapest way to get the house while winning time to fix your score. If it’s lower, they either reject you or raise the rates.

Also known as rent-to-own, you can start living in your house like a tenant. The difference is, you rent to buy the home years later. So every month you pay, part of that money will count for the purchase you’ll make years later.

After 2-5 years, you can choose to either refinance or buy. And by then, you had more than enough time to fix your score and get better conditions.

It’s okay if you don’t want to buy that house. There are also bridge loans for this purpose, where you buy the house you want as you sell your current one.

Managing Your Credit

Managing Your Credit

Now, you know how to buy a house with bad credit. After you make the down payment (if any), it’s smart to start working on your credit repair plan. What better time to do it than now? If you don’t, you’ll end up paying more and more every time.

We’re not going to get into the countless ways to fix it. There’s a credit score guide right here. Instead, here are three options to make things easier:

If you can wait before buying the home, then wait

Your score probably won’t go from 500 to 750 overnight. But even if you only improve by 40 points, that’s thousands of dollars that you save over the years. It may take one year to win 200 points, but 40 doesn’t take that long. Two months or less if you’re lucky.

In the meantime, you can try negotiating for the house to get an even better offer. Or maybe you find other properties. It’s good to take time to think about big purchases.

Should you invest in credit repair services?

By paying these companies, their legal teams will write letters to the credit bureaus and refuse the points that caused your credit score to drop. By default response, these bureaus drop those penalties, which fixes your score in 2-4 months.

These companies aren’t cheap, there’s no guarantee they can remove your bad credit completely. Only hire them if you desperately need to fix your score quickly and are willing to spend $1000-$2000 for it.

Be wary of debt forgiveness programs

When you’re looking everywhere for financial help, it won’t be long before scammers try to contact you. These “agents” offer to repair your credit score or negotiate your debt, no matter how much it is.

Other agencies will convince you they can get you the mortgage you want, even when your credit score prohibits that. All they need from you is an upfront fee and hope for their good intentions.

Although these schemes can be more complex, they generally grab the initial payment and run away. Because even if they were legit, they can’t do anything that you can’t do for free already.

Closing Thoughts: Is The House Worth It?

Is The House Worth It

Your credit score is there to help you with the biggest money decisions you make: getting a house, a new car, or a loan to fund a business.

When your goal is financial freedom, it’s not worth buying the house at the cost of your credit score. Are you sure you want to lose thousands of dollars long term?

No matter what you choose, the least you can do is having an income plan before you spend another dollar. If you don’t want to pay more tomorrow, take care of your personal finance today.

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