How To Get a Home Loan with Bad Credit

Filling out a residential loan application

Buying a home can be an intimidating process for some.  Things that make it easy include having a great real estate agent representing you, deciding on a talented lawyer, and of course, having a great loan.  Many factors go into what your loan percent will be, and a big one is your credit.  If you have bad credit buing a house can be a challenge, but it can be done. 

Here is how to get a home loan with bad credit:

  1. First off, know your credit score.  Your mortgage broker will use your Social Security number to obtain your score.  It may not be as bad as you think.
  2. Clean up your record.  Although paying back old debt and eliminating mistakes on your credit score will not impact your ability to purchase a home on the spot, it is a good idea for the future.  Some brokers and federal programs will overlook credit issues if you provide an explanation or if the problem was not your fault.
  3. Seek financing from a private party.  Finding a loan may mean seeking a loan from a private company or a family member.  As long as the seller of the property is okay with this arrangement - and he may not be in some instances - you can buy the home.
  4. Seek financing from the seller.  In some instances, particularly if the seller knows you and trusts that you can pay back the debt, he or she will finance your loan.  Instead of paying the bank each month, you send a check to the seller for an agreed-upon amount.
  5. Put a lot of money down.  Your ability to get a loan depends on a few things: your credit, your ability to pay it off, your employment, and the amount you will be putting down toward purchase.  The higher the down payment, the lower your financing rate will be.  If you can borrow money or get money gifted to you several months before you think you will be making a purchase, do so.  Most banks will not consider gifted money part of your loan package unless you receive it several months prior to your offer and purchase. If you can't put a lot of money down up front, you may want to look into lease with the option to buy homes. This will allow you to put the money you pay for rent toward the actual cost of the house should you decide to buy it.
  6. Investigate federal mortgage programs. FHA loans are available for buyers with bad credit and/or limited funds. In this instance you will be funded by the U.S. Department of Housing and Urban Development, and not a private bank.  The rates and points can be lower because unlike a conventional loan, HUD does not place the highest premium on excellent credit.  You may also be gifted an amount for your down payment from a family member or non-profit organization.
  7. Get a co-signer.  If your credit is poor you can find a co-signer with good credit.  By agreeing to sign, this person is both vouching for your ability to pay and sharing the responsibility of paying should you fail to pay back the loan yourself.
  8. And always, always, always, compare rates.  It is always recommended that you compare rates with several banks and lending institutions.  Inquire about special programs for people with mending credit reports.  Banks that cannot serve you may be able to refer you to another bank or association that will gladly work with you.

 

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