How to Buy a Home With Poor or Bad Credit
Buying a home with poor or bad credit is possible depending on the situation. A person with a poor credit history due to debt older than two years is more likely to be able to obtain a home loan than a person with current credit issues. A low credit score is not a sole factor in determining a persons ability to obtain a mortgage loan, rather, it is a combination of looking at the credit score, income, down payment and recent credit challenges.
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Instructions
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Obtain a copy of your three credit reports by visiting annualcreditreport.com. You can receive one free credit report per credit agency: TransUnion, Equifax and Experian. Carefully review each report and circle any error you find. According to the FTC, every consumer has the legal right to dispute any incorrect information on a credit report. Dispute any errors by following the instructions on the credit report.
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List each item that has a negative entry within the past two years. Put an explanation as to what caused the negative entry. A mortgage lender will require this information in reviewing your loan request. If you do not have any negative entries within the previous 24 months, you are in a good position if you have sufficient income.
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Lower any credit card balances as much as possible. A goal of one to twenty percent of the credit limit should be your target. This will create the largest increase in your credit score.
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Save as much money as possible for a down payment. The lower your credit score is and the more recent damage to your credit report, the higher down payment you may be required to have.
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Pay off any collections you have unless the account is a medical account. You cannot obtain a mortgage with unpaid collection debt unless it is a medical reason. Attempt to settle the debts rather than paying full price but do not let the collector know you are wanting to purchase a house. A collector knows you cannot buy a house with an unpaid debt and will not settle. Just say you wish to take care of your debt and would like to come to an agreement. Get all settlement agreements in writing before paying.
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Contact a Realtor or mortgage lender. A Realtor can put you in contact with a lender who deals with poor credit. Allow the lender to pull your credit report and review it with you. If you can proceed, find the house you wish to finance and proceed with the formal loan application.
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Tips & Warnings
The lender will advise you if you are in a position to buy or if you will need to save additional money for a down payment or specific steps to improve your credit situation.
A low credit score and a poor credit history will result in you paying a higher interest rate even if you are approved for a mortgage.
References
Resources
- Photo Credit home image by Greg Pickens from Fotolia.com
