two women and a baby new house
Hero Images/Getty Images

Buying a house is difficult enough when you have good credit, but purchasing a home when you have bad credit may seem almost impossible. Luckily, you have some homebuying options if your credit isn’t great.

How credit affects buying power

A bad credit rating affects your creditworthiness in many ways. All lenders, especially those who lend you money to buy a home, review your credit score to learn just how diligent you are in paying your bills and how much you currently owe. A lender’s main concern is the risk of default and your ability to pay a loan back. The lender uses your credit report to help determine these factors.

Check your credit score for free so you’ll see what a lender sees.

You may have to accept a higher interest rate

Your credit rating directly affects the interest rate on your loan. If you have a good credit rating, you might qualify for a lower interest rate, and thus pay less on your mortgage on a monthly basis.

If you have bad credit, you are more likely to qualify for a mortgage only at a much higher rate. This could cost you hundreds of dollars extra per month, which would really add up over a 15- or 30-year mortgage period.

A lender might even just say no

The worst possible result from having bad credit is that you could be denied a mortgage loan. This worst-case scenario can happen for those with only extremely poor credit scores.

But if you’re in that group, don’t assume you’re completely shut out of homebuying.

4 options for homebuyers with bad credit

With poor credit, you might still have options, possibly by making a larger down payment or looking for a loan that allows a lower credit rating.

1. FHA loan

A Federal Housing Administration, or FHA, loan, tends to have a lower threshold when it comes to your creditworthiness. Even if you have a credit score as low as or lower than 580, you can qualify for a mortgage by paying a down payment based on FHA requirements.

To qualify for an FHA loan, buyers must be able to pay at least 3.5 percent of the total home cost if they have a score of 580 or higher. For a score below 580, a buyer must pay more than 10 percent of the home price as a down payment to qualify.

2. Private mortgage

You also can get a friend or family member to put up the money for you to buy a house. If you do find someone, then you have to arrange for how to pay the money back.

A drawback to this kind of arrangement is if you fail to meet your obligation, it can cause hard feelings and even court action.

3. Co-signer

Finding a co-signer represents another option to help you qualify for a mortgage if you have bad credit. The loan co-signer needs to understand that if you fail to make your mortgage payment on time, he or she is responsible. And, if you go into foreclosure, that person’s credit suffers.

4. Making a larger down payment

One of the easiest ways to qualify for a home loan with bad credit is to make a larger down payment. Usually, this requires a down payment of 20 percent or more of the sale price.

Lenders tend to view a large down payment favorably when approving credit, as it signifies an investment on your end.

Conclusion

Having bad credit does not mean you can’t get a mortgage. And while it might take a lot more work on your part or require you to rely on a friend or family member, a new home is not out of reach.

Promoted Stories