Homeownership has long been one of the key hallmarks of the American Dream. However, for many people, that piece of the dream seems locked out of reach. Due to poor credit, lack of income, or both, nearly 46% of millennials surveyed indicate that the down payment they would need to make to purchase a home prevents them from doing so.
Thankfully, even if you have bad credit, not all hope is lost. You can still buy a home. Our 7 tips for buying a house with bad credit will help you get out of the renting hamster wheel and into a house you can call your own.
1. Do What You Can With Your DTI
One of the biggest things that lenders will examine when you apply for a mortgage loan is your DTI or debt-to-income ratio. If it seems like you're paying out too much of your money compared to what you have coming in, that can be grounds for denial. In fact, your debt-to-income ratio can play a major role in your poor credit score, to begin with.
How can you reduce your DTI? Well, there are two ways to tackle that equation. You can either focus on paying down the debts that you owe or you can find ways to increase your income. Start a side hustle, get another job, something that will reduce that ratio to make it easier for lenders to approve you.
2. Know Your Credit Requirements for Loans
Not all mortgage lenders are created equal. When buying a house with bad credit, it's important to know the minimum credit score that a lender will even consider before you start the process. For example, many traditional mortgage lenders won't consider an applicant with a score under 620.
However, if you apply for an FHA loan, that minimum requirement drops to 500, which makes homeownership more accessible. Those loans may require at least a 10% down payment, so you should budget for that.
By knowing the minimum score for the type of loan you want, you can get a better idea of where you should strive to push your credit.
3. Determine Your Budget Beforehand
Another key thing to keep in mind when buying a house, bad credit or not, is your budget. The very last thing that you need is to get a house, only to become housing poor like the 40% of Americans who had to take a second job just to afford their mortgage.
What does "housing poor" mean? Simply put, it means that too much of your monthly budget goes towards your mortgage payments, leaving you minimal cash for other expenses like utilities and food. If you have to choose between gas for your car, your phone bill, or your rent, something has gone wrong in the budgeting process.
The general rule of thumb is that your mortgage or rent should take up no more than 30% of your monthly budget. That's an ideal standard to keep in mind as you figure out how much house you can afford.
4. Prepare for Higher Rates
There's no real way to avoid this. When buying a house with bad credit, you need to mentally prepare yourself for higher interest rates and higher down payments. Poor credit, to many lenders, seems like a sign of fiscal irresponsibility, which entails a great deal of risk for the amount of money they're lending to you.
Higher rates, however, do not have to translate to 'highway robbery'. Don't hesitate to shop around for better interest rates on a loan you'll be paying off for over 20 years.
5. Save Up for a Down Payment
Again, there's no avoiding this simple fact. Unless your credit score is at the top of the top tier, there is no way you're getting out of a down payment. So, go ahead and start saving for the down payment to buy a home now.
How much you're expected to put down on the house varies from lender to lender. The standard advice says to save up at least 10% of the cost of the home you're going to buy. That amount can vary depending on housing costs in your area. If you live in Chicago, you can find out more about the prices of houses from our affiliates.
6. Know and Improve Your Credit Score
Your credit score is a central part of the process of buying a house. Before you even start, it's a good idea to know your score and examine your credit report. This way, you have an idea of what your loan options are, and don't get hit with any unpleasant surprises.
Many things beyond unpaid debt can lower your credit score, and the reports aren't always up to date. So, when you pull your credit report to check your score, make sure that you double-check everything that's on there. If there are paid-off debts still listed, or something discharged long ago, that should be amended.
7. Consider a Co-Signer
If you're still struggling to get the approval you need, and you're buying a house alongside someone else, consider having them co-sign for you. This is a great way to increase your approval odds and decrease interest rates, especially if they have a better credit score than you.
However, it also comes with serious risks for you both should one party or another decide not to make their fair financial contribution. Make sure you know and trust your co-signer unconditionally before you put your name on that dotted line.
Are You Still Worried About Buying a House With Bad Credit?
Buying a house with bad credit can seem like an impossible prospect. However, with the 7 tips that we shared above, navigating the process should prove much easier. If you need help finding the best lenders for those with poor credit, check out our blog for more financially sound articles like this one!