Three Ways to Buy a Home When You have Bad Credit

• December 19, 2016

It seems like there are limited options for individuals with bad credit in regards to buying a home. But instead of languishing in the misery of a poor credit score and thinking that you are condemned to never own a home until you get your credit back on track, you should learn about the various approaches that are at your disposal, and which you could use to buy a home despite what the numbers in your credit report are saying.

Consider saving a larger down payment

If you have a score below 580, a larger down payment will be a necessity if you want to get financing for buying a house. But if your score is slightly higher than this, you could consider having a larger down payment to compensate for the low credit scores. In most cases, you will find that you will have to make a down payment of at least 20% of the home’s total value.

With a larger down payment, you will be indicating to the lender that despite your poor scores, you possess the ability to shoulder the loan. As a result, your home equity will increase upfront and you will also lower your loan-to-value ratio immediately.

Use other ways to demonstrate your financial stability

The systems used by lenders to determine your candidacy for a mortgage are automated systems, but this should not be taken to mean that you are automatically out of the game if you have poor scores. The lenders have the ability to go the manual underwriting route, and they are always ready to overlook the low scores if you are able to demonstrate to them that you are financially stable in other ways. For example, you can show them cash reserves for at least six months or one time rent payments for ten months or more.

Additionally, if you have a high income and low debt payments, you may still be able to convince the lenders that you are a less risky loan candidate. The bottom line is that you should be able to provide a logical explanation as to why your credit score is poor and also convince them that despite the poor scores, you have what it takes to meet the obligations of the mortgage.

Consider private mortgages

Other than the large financial institutions, private lenders should also be one of your options if you want to buy a home when you have bad credit. Private mortgages can be from individuals with cash in hand to pay for your mortgage in full, upfront; then all you have to do is to repay the debt according to the set of terms and conditions you will agree on.

The lender can be a friend, a family member or any other private lender offering mortgages. Even though private mortgages have their own fare share of downsides, it is a viable option if you want to buy a home, but you are handicapped by a poor credit score.