Is it Possible to Buy a House With Bad Credit?
Becoming a homeowner means getting a mortgage loan to pay for one of the biggest expenses most people ever make. Getting a loan can be difficult or impossible for consumers with poor credit histories. However, some lenders and government programs make it possible for home buyers to get a loan despite bad credit.
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Reasons
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Buying a home has advantages that renting or leasing don't offer, and these advantages can apply to consumers with good and bad credit alike. An individual with bad credit may see homeownership as a chance to stop throwing money away on rent without building any equity. When home prices are low, renters with bad credit may see it as a good time to try to break into the housing market by purchasing a home that's likely to increase in value in the future. Finally, owning a home gives the owner more control and responsibility than renting.
Factors
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Banks and mortgage lenders decide whether to extend a home loan to a consumer with bad credit based on a number of factors. One of these is the extent of the damage to the borrower's credit. Lending Tree defines good credit as a credit score between 620 and 650, and notes that borrowers with scores as low as 500 may still be eligible for select mortgages. Lenders also consider supply and demand, lending only to customers with higher credit scores when possible. During an economic recession, lenders may be forced to extend loans to borrowers with worse credit to remain active in the housing market.
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Options
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Aspiring homeowners with bad credit should consider each of the available mortgage options, including standard mortgages from banks and government-backed mortgages designed for consumers with bad credit. These mortgage programs, administered by the Federal Housing Administration, are available to first-time home buyers, senior citizens and home buyers looking for a house that requires extensive renovation or repair. The federal government backs these loans to encourage homeownership and borrowers can benefit from low down payment options.
Drawbacks
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Getting a home loan despite bad credit may seem like a smart financial decision, but it isn't always the best choice. Banks and mortgage lenders charge higher interest to customers with bad credit because of the increased risk of doing business with them. This can translate to a home costing thousands of dollars more than it would cost a buyer with average credit. Paying a lower down payment through a government loan program also means higher monthly payments or a longer repayment schedule.
Alternatives
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Instead of going forward with a home loan, borrowers with bad credit can choose to delay buying a home until their credit scores improve. This may mean renting an apartment or house while paying off debt and securing a steady job. Making regular payments on a credit card will cause a credit score to improve gradually over time, so that applying for a loan in a few years may mean a much lower interest rate and greater long-term savings. Renting to own is another option, in which a renter pays for a portion of a home and then faces the choice of whether to finance the remainder of the home or allow the lease to end and move out at the end of the term.
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