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4 Ways To Buy A Home When You Have Bad Credit

First Time Buyers  Home Buyers  Money Talk  Real Estate 101

Did you know it’s still possible to be eligible for a home loan with a low credit score? Many people assume that because their score is below 700, they won’t even be considered for a mortgage and therefore give up before even trying. The truth is, there are quite a few options out there to get you into your new home with a credit score as low as 580. Here are a few of the best options we found but remember – repairing your credit score, paying back debts and waiting to buy a home is always your best bet!

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1. Look Into FHA Loans

Unlike a traditional bank mortgage, FHA, or Federal Housing Association, mortgages have a much more flexible criteria for who qualifies and better terms for those who loan through them. Since the FHA is not a lender but an insurer for lenders, they are more likely to take on “higher risk” clients like those with low credit scores and smaller down payments.

The FHA caters to those who have credit scores as low as 580. With this score (or higher), the FHA only requires a down payment of 3.5% – a huge leap from the traditional 20%. There are also options for those with a credit score between 500 and 579, but they require a minimum of 10% down payment and anything below 500 will only approved on a special case basis.

Another factor that is unlike traditional loans is the requirement to pay 2-part mortgage insurance. The first part of this requires you to pay 1.75% of the loan amount as an up front payment where the second part is the monthly (or annual) premium.

There are similar lenders to the FHA like Fannie Mae and Freddie Mac but they usually require a larger downpayment and have limited loan availability. It is best to look into all financial options to find which one will work best for your situation.

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2. Boost Your Down Payment

Luckily, lenders don’t only look at your credit score when considering your mortgage application. They also take into consideration what your down payment will be, and the higher it is, the better your chances will be.

Since banks look on credit scores under 600 as “bad credit” or “high risk” it’s absolutely essential that you go into your loan meeting with a higher than average down payment in order to sway the lenders decision. Having a large down payment shows the lender that you are able to take on the loan despite your past credit history. It also lowers your loan-to-value ratio, which gives the lender more faith in you because the more you have invested in your home upfront, the less likely you are to default on your loan and leave them high and dry.

If your credit is below 580, consider saving up at least 20% of your down payment. This will give you a much higher chance of being approved for your loan.
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3. Know Where To Put Emphasis

Even though you may look high risk according to the automated services that banks use, that doesn’t mean there is no chance of getting that home loan. Many people may not know that the lender has the ability to bypass your low credit score and base your eligibility on other factors like previous consecutive rent payments, cash reserves or a high income.

However, you have to be prepared to explain what got you bad credit in the first place. While there may not be much they can do as far as consumer debt (like racked up credit cards), medical and student debts are viewed in a completely different way and may be over looked by the lender.

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4. Rent To Own

While this is a rare opportunity, it isn’t unheard of and can be the ticket to homeownership for people with bad credit.

Although this usually only occurs when a seller is desperate to sell their home, and the buyer is desperate to find a home, it could work and make a perfect match. What happens when renting to own is a bank or lender approves you to begin paying rent with a chunk of it going towards your down payment each month. After about 2 years, you will have the option to buy your home with the down payment that has accumulated from the rent payments.

If for some reason the deal doesn’t work out, you still have the ability to walk away from the deal but your previous rent payments will be treated as just that – rent, and you will have no down payment to take with you towards your next home.

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