How to Buy a New House With Bad Credit

Buying a new house with bad credit is challenging, but certainly possible. The Washington Post reported in 2009 that the Federal Housing Administration was backing mortgage loans for people with credit scores as low as 500. According to CNN Money, that's considered to be a poor credit score, well short of the minimum 620 score typically needed for home mortgage approval. Credit website BCS Alliance says bad credit can be offset by making a larger down payment and paying down as much of your debt as possible before applying for the mortgage loan.

Difficulty:

Moderate

Instructions

1. Obtain your credit report and score. Get a free copy of your report from Annual Credit Report---a website established by the nationwide credit bureaus. You're entitled to three free reports from the site (see Resources) every 12 months under the terms of the Fair Credit Reporting Act. After receiving your report, follow the included instructions to order your credit score separately for a fee.

2. Review your credit report and score to determine just how bad your credit is. Improve your report and score by making sure all your open accounts are current. Also resolve any negative entries on your report including collection accounts and charge-offs. Collection accounts are accounts that were closed by the original creditor and sent to a collection agency. After closing the account, the original creditor lists it as a write-off for tax purposes and then records it as charged-off on your credit report. Improve your chances for mortgage approval with bad credit paying off these delinquent accounts.

3. Improve your credit score by paying your bills on time, month after month. BCS Alliance says that is one of the quickest and most effective ways to increase your score.

4. Hire a real estate agent with experience representing home buyers with bad credit. The agent should be knowledgeable about FHA financing, which may be your best bet if your credit score is below 620. The agent should know local lenders who offer loans backed by FHA or are otherwise comfortable lending to bad credit borrowers. Shop for your loan before finding your new home. Meet with several lenders to discuss your credit history and overall credit worthiness. Ask the lenders for tentative approval on a home loan based on your qualifications.

5. Find a new home matching your requirements and any pricing guidelines set by your potential lenders. Then formally apply a loan. Select the best deal---and lowest interest rate---provided by the various lenders.

References

• The Washington Post: FHA Balancing Act
• HUD: Common Questions From First-Time Home Buyers
• BCS Alliance: Mortgages And Credit Score
• CNN Money: All About Your Credit Score