37% of first-time home buyers can afford the standard 20% down payment, according to a report by Zillow. While that might sound shocking, it’s no wonder when you consider that Americans have record-breaking credit card debt and oppressive student loan balances.
Fortunately, some mortgage loans are designed to help people who can’t afford a big down payment. What’s more, first-time home buyer programs and grants can help you get the cash you need to close on your loan. To improve your chances of getting into a home, know what’s available and which steps you need to take to get help.
Buying a house with bad credit is possible, but it will likely end up costing you extra money in the long run. Here are 3 tips to follow if you want to buy a house even if you have bad credit.
Step 1: Find out your credit score
The first step buying a home with bad credit is to get your credit score. Are you thinking of checking your credit, but worried it may hurt your credit score? If so, you’re not alone. The idea that checking your credit negatively affects your credit score is a common belief — but rest assured, it’s false. Read on to find out more about checking your credit and the impact it has on your credit score.
It’s time to check up on your credit score. You can get your FICO credit score for free in a lot of places, including some banks and credit card companies.
Keep in mind you have three credit scores, one each from Equifax, Experian, and TransUnion, the major credit reporting agencies. It’s a good idea to find out all three.
Step 2: Check for errors on your credit report
Understanding your credit history is key to understanding what’s affecting your credit score. Your credit report features details like your personal information, your payment history, and whether you’ve filed for bankruptcy. Getting your credit report can help you figure out any discrepancies so you can report errors, pay off debts, and boost your score.
There are three different credit reporting agencies. They are Equifax®, Experian® and TransUnion®. The information these companies have about you may differ slightly from report to report. You can request a copy of your credit report from each agency for free once a year.
Contact each company individually to receive your credit reports and then review them carefully. You may find errors, such as reports of owed debts which have, in fact, been repaid or even someone else’s credit information, as can happen, particularly when two people with the same name share an address. Clearing up errors on your credit report is not easy, and it does take time, but it is the fastest way to get your credit score up.
Step 3: Be willing to pay higher interest
If you do not want to wait until your credit has improved, understand that if you are approved for a mortgage, you will likely be expected to pay significantly higher interest rates than the average consumer.
A higher interest rate does equal a higher mortgage payment. Here’s a comparison between two rates:
Scenario: You take out a 30-year, fixed-rate mortgage loan of $200,000 with an interest rate of 3.77 percent.
Payment: Your monthly payment, not including property taxes or homeowners’ insurance, would be about $928.
Scenario: You take out that same mortgage but with an interest rate of 5 percent.
Payment: Your monthly payment, again not including taxes and insurance, would jump to about $1,073, or a difference of $145 a month or $1,740 a year.
Step 4:Bonus Tip
An FHA loan is a loan backed by the Federal Housing Administration. If you’re a first-time home buyer or haven’t purchased a home in the last 3 years, you could qualify for this loan.
The minimum credit score needed to get an FHA loan is usually around a 580; however, if you can make a 10% down payment, you can probably get approved with a credit score between 500 – 579. Rocket Mortgage™requires a minimum score of 580.
FHA loans also have additional requirements that must be met for you to qualify for the loan. For instance, you can only use an FHA loan to purchase a primary residence.
Work On Improving Your Credit Score
If you find that you can’t qualify for a loan, you’ll want to take steps to become more creditworthy. Review your credit report again to see what is impacting your credit score, then take steps to improve it. Consider decreasing your debt-to-income ratio by increasing your income, paying off debts, or both.
Consider using credit monitoring tools — there are free tools, some provided by your credit card issuer — so you can keep track of your credit score and figure out when it’s time to apply for a home loan.