Buying a house with bad credit scores
Trying to buy a house with good credit can be an overwhelming process to begin with. But if you have bad credit, you may be wondering if it’s possible at all.
Good news is it’s not impossible to buy a house with bad credit. It just takes careful planning and patience depending on the reason why your credit is not good.
To begin assessing your credit, it’s important to understand why your credit scores are low to begin with.
Common reasons why your credit scores may be low
- High balance on credit cards (even if you’re never late on payments)
- Not enough credit history
- Missed payments
- Collections
- Bankruptcies
- Foreclosures
- Judgments
- Wrongful account/information reporting
- etc..
How your credit scores are determined by the credit bureaus
Buying a house after bankruptcy
If your credit score is low due to bankruptcy, there are specific waiting periods to keep in mind.
| Bankruptcy Type | FHA | Conventional Loan |
|---|---|---|
| Chapter 7 | – Must wait 2 years from discharged date (not filing date). – Must write detailed explanation. – Must establish a good history of credit after filing bankruptcy. | – Must wait 4 years from discharge date. or – 2 years from discharge date with well documented extenuating circumstances. |
| Chapter 13 | – Minimum 12 months with satisfactory payment history and court approval. | – 2 years from discharge date. |
| More than 1 bankruptcy within past 7 years | – No specific restrictions | – 5 years from most recent discharg date. or – 3 years from most recent discharge date with well documented extenuating circumstances. |
Buying a house after foreclosure
Buying a house after recent foreclosure is probably the biggest challenge if this is the reason why your credit is not good.
Waiting periods are bit longer with foreclosures, but even then, it’s still possible to buy a house.
| Housing Events | FHA | Conventional Loan |
|---|---|---|
| Foreclosure | – Must wait 3 years from case ending date. – 12 months from case ending date considered with extenuating circumstances. | – Must wait 7 years |
| Deed-in-Lieu of Foreclosure | – Same as above | – Must wait 4 years. – 2 years permitted with extenuating circumstances. |
| Short Sales | – Sam as above | – Must wait 4 years. – 2 years permitted with extenuating circumstances. |
Home loan options for buying a house with bad credit
If you have no history of bankruptcy or housing events (foreclosures and etc..), you may be eligible to buy a house as is. It just depends on the reason for low credit scores.
For example, if your credit card balance is high or have couple of minor collections, you may not even need to pay those off to qualify.
In modern day mortgage process, it’s not just the human underwriter that approves the loan. All Conventional, FHA, VA, and USDA loans must first get approved through an Automated Underwriting System (AUS).
It’s this part where it can get tricky. If the system doesn’t like your overall qualifications, you may not qualify even though you meet the minimum requirement.
When this happens more down payment may be needed to get the job done.
Conventional Loans
Minimum credit score required for conventional loan is 620. This qualifies you for 3%-5% down payment program.
Keep in mind that just because you have 620 credit score doesn’t mean you’re guaranteed for maximum financing. It depends on your overall qualifications and other factors.
Some times you may need to put more than 5% down to get approved.
More: Conventional Loan Requirements
FHA Loans
Minimum credit score required for FHA loan is 500. This qualifies you for 10% down payment program.
For maximum financing of 96.5% LTV (3.5% down payment), you’d need minimum credit score of 580.
Just like Conventional loans, you may need more than minimum down payment needed to get approved.
More: FHA Loan Requirements
VA Loans
Minimum credit score required for VA loan is 620.
VA loan is backed by Department of Veterans Affairs to U.S. military veterans, active members, and qualified spouses to buy a house with no money down.
This loan is also not a guaranteed approval just because 620 credit score is allowed.
However, VA loans are more forgiving on debt to income ratio unlike Conventional loan or FHA loan.
USDA Loans
Minimum credit score required for USDA loan is 620.
USDA loan is also backed by U.S. Department of Agriculture to allow you to buy in a qualifying rural areas with no money down.
Not only 620 credit score is not a guaranteed approval, USDA loans have strict rules where your income may be too high to qualify.
How to increase your credit scores
If you’ve filed bankruptcy or foreclosed in recent years, there’s not much you can do than to re-build your credit and wait. Otherwise, your payment history and the amounts owed are the most important credit score determining factors.
Here are some tips you can do to increase your credit score besides paying your accounts on time.
- Ask your credit card companies to increase your limit
- Add new accounts in bulk (but keep the balance $0)
- If behind on payments, bring them up to current balance immediately (If you’re seriously behind, talk to your creditor about coming up with a payment plan)
- If possible, start lowering the balance owed on your revolving accounts (credit cards)
- Don’t be late on future payments
- Dispute wrongful information
- Pay all judgments/child support dues reporting
- Pay to delete your collections accounts
- Hire a reputable credit repair agency
Note: Hiring a credit repair agency is not necessary but it may save you time and headache.
Rebuilding your credit and its benefits
Even though you may qualify to buy a house with bad credit now, it’ll save you thousands of dollars to improve your credit profile first.
Why you may want to improve your credit score to buy a house
- Better chance at loan approval – As noted many times previously, just because you meet the minimum requirements doesn’t guarantee loan approval.
- More lending options – Instead of being limited to just one loan program, you qualify for number of different programs that may be more attractive to you.
- Better interest rates – Among other factors interest rates and mortgage insurance (for conventional loans) rates are largely influenced by your credit scores.
If you’d like to discuss your current loan options or start planning for future purchase, contact us for a no obligation consultation: Credit Consultation
