Can You Buy a Home With Bad Credit?
Buying a home with bad credit might be possible because this is only one of the criteria that lenders use to determine if you qualify for a loan. It is more difficult to purchase a home with poor credit, and it can also be more expensive because those with bad credit might receive a higher interest rate by their lender. Each lender makes the determination of whether an applicant's qualifications are too low to receive a loan.
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Causes of Bad Credit
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The cause of your bad credit, and the current trends in your credit report, help determine if a lender will loan you money. Those who have filed bankruptcy, for example, but are working on rebuilding their credit score are more likely to obtain a mortgage than those who have several accounts in collections. Lenders look at the trends occurring in your credit history to know if you are too high of a risk to lend to.
Debt to Income Ratio
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This ratio compares how much debt you have to the amount of income you have. The higher your debt percentage, the higher risk you are. Federal programs with FHA loans and VA loans will not approve an individual who has a debt to income ratio that is higher than 30 percent.
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Income Verification
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One of the benefits of buying a home is that the property helps to secure the debt. The loan has backing by the value of the home. This means, if you default on the loan, the lender might foreclose on the house and resell it to reclaim some of the lender's investment. This reduces the risk to the lender considerably. Therefore, those who have poor credit might still qualify for a mortgage if they have steady employment and the income to make the monthly payments. Not all individuals will qualify based on income and employment, though.
FHA and VA Guarantees
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For those with bad credit, the U.S. federal government offers several options to help qualify for a home loan. The FHA, or Federal Housing Administration, offers loan guarantees to first-time home buyers and others. This process works much like insurance to protect the lender. If you should default on the loan, the lender can file a claim with the FHA to recoup some of their lost profits. The U.S. Department of Veterans Affairs, or VA, also offers this type of guarantee for those who have served in the Armed Forces (see Resources).
Limitations
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To buy a home with bad credit, individuals must meet strict qualifications. It might be necessary to have a larger down payment--as much as 20 percent. FHA loans, by comparison, only require a 5 percent down payment. The amount of money borrowed might be limited for those with poor credit. In addition, individuals simply might have too poor a credit score to qualify for the mortgage. This is an individual lender's decision.
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