So you want to buy a house, but your credit is terrible, and that’s what you say every time someone asks you, so you remain content with that excuse and go about your day. Well, what if I told you that buying a house with bad credit isn’t as impossible as it would seem? Wouldn’t believe me I bet? Well, stick around and I’ll change your mind.
Not only is buying a home incredibly overwhelming, so is the thought of your bad credit limiting you from your goals as a homeowner. It’s not hard to blemish your credit score, whether it happened during your youth, or you didn’t grasp the idea behind a credit card after racking thousands of dollars on it and never paying it off, getting a mortgage won’t be easy, but I’m going to be optimistic and share some knowledge about the possibilities, in case you didn’t know already.
Before I hop into the nitty gritty of this blog, let me first breakdown what a “bad” credit score is. After doing some more digging on the big three credit bureaus, your FICO score is based on these factors: credit history, new credit, type of credit, payment history and the amount owed. With all that in mind you will be graded from 300-850. Since that range is incredibly large in terms of your actual credit score, I’ll break it down in increments to give you an even better idea. If you credit score is 800-850, you’ll most likely be approved for the best terms possible and you can give yourself a nice pat on the back for building your credit up to that point. We’ll call this group “excellent”. 720-799, you’re still awesome and I highly suggest you pat yourself on the back too. This group will be known as “very good”.
You’ll get a great rate and numerous options for your loan. We’ll call this next one “good”. 620-719, You’re still good, but at this point you could find yourself paying a slightly higher interest rate based on your credit history. 580-619, we’ll call this group “fair”. You can still be pre-approved for an FHA loan, but you will most likely be required to have less debt and be expected to pay a higher interest rate. Last but not least, we have anything under a 580 credit score to be considered as “poor”. It’s not a very good name, because that doesn’t mean you’re poor, you just may have not made the best financial decisions along the way, and that’s okay, because it’s about how you rebound from the situation, and not just accept the fact that you won’t ever be able to own a home.
A lot of potential borrowers assume that credit score is the one and only tell all to whether or not you’ll get pre-approved for a mortgage, but in reality, there’s a few other factors such as: your down payment amount, income and assets, debt-to-income ratio, work history, and if you’re having a co-signer hop on that loan with you or not.
On top of that, you could get your hands on some assistance to help the home buying process a little easier. Some of those programs include: Home possible and homeready, home path, employee assistance, mortgage credit certificate (depending on state and local offerings), along with nonprofit and governmental grants.
The increments I mentioned earlier are displayed just like I said on numerous sources across the internet, and even for me at a glance, I think “a 580 credit score seems to be the lowest any program can go, so I guess I’ll just hold off longer.” I don’t blame you, because at the end of the day, the majority of these sources are mortgage lenders, and they don’t want to take on the extra risk of someone with a low credit score.
Let’s take a look at the FHA loan real quick. This government-backed loan that’s known to be a 580 credit minimum with 3.5% down is oftentimes the go-to for first time homebuyers, but what a lot of people don’t know is you can secure this loan at a 500 credit score to. Granted there is a downside, and that’s having to put more money on the table, but it’s possible! In this case you’ll find yourself having to put 10% down on a home with a credit score like that. Your interest rate will most likely be higher, but lower–credit FHA borrowers tend to secure a rate significantly less than on conventional loans.
There’s also a non-qualified mortgage or what’s known as a bank statement loan option you could apply for. With a 500-580 credit score, this option is a little more common for individuals who don’t have a lot of income documentation. For example, like myself, a real estate professional. Some months, income is higher, some months it’s lower and I invest more money into my business instead of throwing it in my bank account.
At-a-glance it could appear I couldn’t pay my mortgage, but in reality, my money is in numerous accounts. The pros to this method are, you don’t need to have amazing credit, income documentation is less stringent, and the application process doesn’t have you jump through any more hoops than the typical loan process. The biggest downside to these loans is the hardship in finding a lender that will do it. And on top of that, you can expect to pay a higher interest rate and fees.
Okay Andrew, but what about those “no money down” loan options? Thanks for reminding me. USDA Loans, which stands for U.S. The Department of Agriculture made this loan option in an attempt to increase homeownership in rural areas. USDA loans are known best for their zero down payment requirement and low rates. The downside is, the needed credit score is typically a 640. This loan option is best for people who have a fair credit score, but don’t have a lot of money to bring to the table, hence the zero money down feature. A big qualifier for this loan is that your income can’t be more than 115 percent of the median household income in your area. The keyword there is household, not individual. As I mentioned, the USDA is trying to increase homeownership in rural areas, so there is a limitation to the areas in which this loan will qualify. So be sure to hit the link in the description to view the USDA eligibility map to see if you can capitalize on this loan option.
If you want to know about more ways to get financed for a loan, I made videos about: finance options in Michigan, importance of mortgage approval, 15 year vs 30-year mortgages explained, large or small down payment, and buying a house with student loans (which can be useful for people without loans as I touch on how to get pre-approved despite the heavy debt), and I’ll link all those below:
→USDA Map: https://bit.ly/3giwH9n
→Finance Options In Michigan: https://bit.ly/3rlFrlm
→Mortgage Pre-Approval: https://bit.ly/3rjCodv
→15-Yr Vs. 30-Yr Mortgage: https://bit.ly/3rifQd8
→Small Vs. Large Down Payment: https://bit.ly/3sb4N4F
→Buying A Home With Student Loans: https://bit.ly/3AP7YDh
I’m not a mortgage lender by any means, so if you have questions pertaining to mortgage options, reach out to me anytime and I’ll get you in touch with a few of my preferred lenders who’d be happy to assess your situation.
Andrew McManamon is a licensed Real Estate Professional in the great state of Michigan. His philosophy to put people first has paved the way to his extraordinary real estate career. Born and raised in Brighton, MI, Andrew acquired a bachelors degree in business management and marketing from Cleary University in Howell, MI. The combination of his experience and education allows him to take a strategic approach towards every transaction and help his clients make more informed and confident decisions.