Purchasing a home is still one of the most important life milestones. It not only contributes to a more stable financial future but also perpetuates a sense of community and belonging for many. It is also a stressful process littered with potential pitfalls along the way. This is especially true for people that have not planned effectively to buy a home and thus don't have the credit profile ideal for making such a major purchase. You may be wondering how to buy a house with bad credit.
Bad credit can not only stop a home purchase, but it can derail you in many other facets of life. But even with the importance placed on credit, there are ways to work around this issue to become a homeowner. Learning how to buy a house with bad credit not only offers educational aspects to help clean up credit but also provides you a path to homeownership that can have benefits for years to come.
Education is the key to navigating this complex process effectively. You can't work on what you don't know. This means starting with an assessment of your credit profile. Although stress-inducing for most, it is imperative to know where you stand financially before you even approach mortgage lenders, look at homes or enroll in first-time homebuyer programs.
There may be errors on your credit or things on the report of which you weren't even aware. You can access a free copy of your credit report every year. Pull a copy of the report and look it over in innate detail. Once you know where you financially stand, you can address the challenges of buying a home with a bad credit profile.
The Bad Credit Blues
Bad credit can do more than stop you from making a home purchase. If you are successful in getting a mortgage, bad credit means you are likely to pay more for the home in the long run because of a higher interest rate. The interest rate is the amount a lender charges you for lending you the money for the purchase. If you have bad credit, the lender considers you a higher risk and thus will charge you more to lend you the money for the home. This is the case for people with bad credit for any major purchase; interest rates for bad credit are always higher than they would be for those with good or even satisfactory credit.
Even an assessment of your credit may not be enough to remedy the situation if you owe a great deal of money to various creditors. When considering how to buy a house with bad credit, one of the first reality checks of your circumstances is that it may take more time. You need time to pay down some of your creditors and clean up your credit report. While you don't have to have perfect credit to own a home, if you have a significant number of outstanding debts, you need to get them paid before you approach a mortgage lender.
Call your creditors and work out an arrangement to get your most significant debts paid. Any "good" debt on your credit report can be beneficial. For instance, if you have a credit card on which you make timely payments, mortgage lenders consider this "good" debt and can reflect favorably on your credit profile. There are also some debts that cannot satisfied before purchasing a home. For instance, if you have student loans or a car payment, then you need to ensure that your payments are timely and consistent.
Focus on those debts that are old, reflect a high balance or high interest rate and have a negative payment history. These are the kinds of inclusions on your credit profile that can drag your score down and cause mortgage lenders to take a dim view of your ability to manage a mortgage loan. Pay down these debts and specify credit reporting in any repayment arrangement. This ensures that the creditor will report the debt as satisfied once you've paid it off.
The Benefits of Homeownership
There are plenty of benefits to homeownership. The first is that there is a major tax advantage for owning a home, which is imperative if you have a healthy income and few other opportunities for tax breaks. A second benefit is that homeownership equals financial security for the future. If you take good care of your house, make improvements, and purchase homes in desirable areas receive a considerable bump in the equity of the home (what it's worth versus the original cost). Ideally, if you allow this equity to build over time, you can sell your home and make a profit.
Alternatively, you can refinance your mortgage loan for a lower interest rate and ultimately pay less. If you own a home, you enjoy the security of a consistent mortgage payment versus fluctuating rents and can make improvements and changes at will.
Homeownership allows you to create a space that is your own in every way. As a homeowner, you can repaint your house, landscape your home exteriors, add accents, change anything you don't like and otherwise make your home reflect your taste and style. You can't do this when renting a home that does not belong to you. Homeownership promotes a sense of physical stability. Those that stay in their homes until they are paid off enjoy a sense of financial stability in their retirement years.
How to Buy a House with Bad Credit
In consideration of how to buy a house with bad credit, it's best to take your credit report to a mortgage counselor. This professional can apprise you to any additional measures necessary before applying for a mortgage. Every time you apply for any kind of loan or form of credit, the company pulls a copy of your credit report. This information reflects on the report and can impact your credit score (a numerical representation of your credit), dragging it down because of many inquiries. Control these inquires with initial preparation and close cooperation with potential lenders.
Work with a mortgage counselor on how to buy a house with bad credit regarding your specific circumstances before you approach a mortgage lender to ensure that you are ready before allowing inquiries. This professional can guide you through the process. You can pre-qualify with a lender by providing simple information about your specific circumstances, including the condition of your credit, income, assets and more. This information can tell a lender whether you qualify in pertinent areas outside of credit, so you don't incur an unnecessary inquiry.
The most important aspect of how to buy a house with bad credit is income. If a mortgage lender can't gauge your worthiness by your credit, then the company does so by your income. If you have a steady income that can support a mortgage payment comfortably, then your chances of success increase exponentially. Mortgage lenders will require documentation in the form of income statements (e.g., pay stub), bank statements and copies of income tax filings. They may request additional information based on the lender, their specific requirements and the condition of your credit. It is possible to navigate how to buy a house with bad credit, but it is an extensive, document-laden process. This means that patience is paramount. You are trying to prove to the mortgage lender that your bad credit does not define you as a potential homeowner and that you are trustworthy to make your payments.
If this is your first time purchasing a home, work with first-time homebuyers programs. These programs not only assist with the substantial down payment required for homeownership but also they offer professional help to navigate the pitfalls of the entire process. For those with bad credit, this help can prove invaluable.
If you are wondering how to buy a house with bad credit, it is possible. The process requires knowledge of the home buying process, an honest assessment of your financial circumstances and patience. There are many benefits of homeownership, and bad credit should not stop you from experiencing them. Bad credit may delay the process or it may make getting a mortgage more challenging, but there are more opportunities than ever for people with bad credit to purchase homes. In fact, there are programs dedicated especially for people with bad credit because it is such a common issue.
The road to owning a home is already a stressful process, and bad credit can exacerbate this stress. However, for those willing to do what it takes to repair their credit enough to get a mortgage find they benefit in the long-run. Owning a home increases your financial viability and is one of the most significant assets a person can own. Homeownership also ensures that you have a home of your own to customize and change at will. There is a kind of reassurance in claiming a space of your own by creating a home in a house that will one day belong solely to you.