I want to buy a house, but I have bad credit. What should I do?
The American Dream for many is when you’re ready to buy your first home. For years you have worked hard, saved and perhaps started a family. The road to homeownership can be exciting, stressful, confusing, and overwhelming. When I purchased my first home, I had no idea what the home buying process entailed. I experienced all these feelings along with many more as I went through the process. Being prepared to purchase a home is beneficial whether buying a house for the first time or tenth time.
Get Mortgage Ready
What does it mean to become mortgage ready? There are three primary keys to convey mortgage readiness to a financial institution.
- First, all lenders review your credit history and credit scores from all three credit bureaus and choose the middle rating. This is known as a tri-merge. It’s a good idea for you to pull all three of your credit reports ahead of time. This way you are better prepared and IF something needs correcting, you can catch it early.
- Second, they analyze your capacity to repay the loan by looking at your debt to income ratio. Aim for your mortgage payment (Principal, Interest, Taxes, Insurance combined) to be no more than 25% of your income.
- Third, there is a review of the collateral value (the house) you are buying to determine what it’s worth. This is done with the required appraisal.
Each financial institution sets its criteria for qualified credit history and credit scores, debt ratios, and collateral values they look for. Shop around with a few lenders before you find one that will work with you. Also, just because one lender states for instance 3.40% does not mean all will be the same. It pays to shop and ask for a breakdown of their fees along with current interest rates.
Options for Low or No Credit
If you don’t have good credit, don’t give up hope. It may be you will be required to have additional funding and an alternative form of credit such as:
- Larger Down Payment: A down payment reduces the risk for the lender. You have skin in the game. They have a buffer. Try to have at least 20% for your down payment as it will save you money on PMI. It also shows the lender you’re serious and reliable.
- Cash Reserves: Even with a sizable down payment, it’s helpful to have
- ample cash reserves on hand. Let’s say you have 20% down with an additional $10K in your emergency fund. This shows the lender if the water heater suddenly explodes you have ample funds to make necessary repairs.
- Rent History: Be able to verify that you’ve paid your rent-on time consistently for 12 to 24 months.
- No Credit: If you have no credit or an extremely low score consider the option of Manual Underwriting. It requires more paperwork for you to submit and may take a few weeks longer but I have known several clients and fellow coaches go this route with great success.
I wish you the best in your homeownership pursuit! If you are ready to sit down and look at whether home ownership is good for you in the near future reach out to me. We can look at your numbers together and create a plan that makes your home a blessing!