9 Smart Tips to Buying a Home with Bad Credit
Dream of owning a home, but have bad credit? Well, the dream is not necessarily dead.
Even if a few financial mistakes have impacted your credit score, you can still take steps to increase your chances of getting a loan.
Make a Larger Down Payment
If you have a low credit score, you may be able to compensate by providing a larger down payment. According to Yahoo!: “A large down payment signals to the lender your ability to shoulder the loan despite your credit history, increasing your equity in the home upfront and immediately lowering your loan-to-value ratio. The idea is, the more you have invested in the home, the less likely you are to default — and the less risk you pose to the lender.”
For those with good credit, the minimum down payment is usually in the range of 3.5% to 5%. But with a lower credit score, you’ll likely have to put down 10% to 20%.
Show a Record of On-Time Rent Payments
In the absence of good credit, you need to demonstrate to lenders that you are financially responsible. By proving a history of on-time rent payments, you may be able to ease concerns about your ability to pay back a potential loan.
Get a Cosigner For Your Loan
By getting a cosigner, you may be able to significantly improve your chances of getting a home loan. A cosigner may also be able to help you get better loan terms, including a lower interest rate.
But keep in mind the potential risk for the cosigner. According to The San Francisco Chronicle: “Because a cosigner is essentially a co-borrower on the loan, the mortgage will appear on both of your credit reports. In the event that you default on the loan, the cosigner will be held liable for the outstanding balance.”
If you’re Married, Don’t Necessarily Apply for a Joint Loan
One of the benefits of marriage is the ability to blame your spouse. All jokes aside, you may have decent credit, but maybe your husband or wife has a few financial missteps.
If so, you may consider applying for an individual loan, leaving your spouse off the application.
However, there is a drawback: If your spouse is not listed on the loan application, his or her income cannot be considered.
Take Care of Outstanding Liens, Judgements, and Collections
You’re trying to make a good impression, so do your best to avoid any red flashing lights during the process. By addressing liens, judgments, and collections before applying, you will likely greatly improve your chances of getting a loan.
Pay Down your Debt
Did you go on a bit of an unadvised credit card spending spree? Paying down your debt as much as possible will enhance your appeal to lenders.
Demonstrate a Solid Job History
If you’ve maintained employment for a long period of time, you can show you’re dependable. Demonstrating a steady stream of income can go a long way to improving your chances.
Show Cash Reserves
Admittedly, this is a bit of the “chicken and the egg” scenario. But if you can show you’ve saved up for a rainy day, you’ll be more likely to make your payments in the eyes of the lender.
Apply for a Balloon Loan through your Local Community Bank
Balloon loans are short-term mortgages that have some features of a fixed rate loan. The loan locks in your rate for certain period, known as the balloon term. After this expires (often after 62 or 120 months), the terms are renegotiated and renewed for the remaining balance. Balloon loans may be appropriate for small dollar loan amounts or for those who are not able to obtain the conventional long-term fixed rate due to credit underwriting restraints.
Larger corporate banks are usually hesitant to make these type of loans. Your best bet may be your local community bank. For example, the Bank of Southside Virginia can make these type of loans in-house. They may have more flexibility to work with you and provide a more personal level of service.
So if your credit is less than sterling, you still have potential options. The key is to have a game plan. Before you even apply, consider what you can do to improve your chances. It’s possible that with a bit of effort, you’ll become more appealing to lenders, getting you closer to the house of your dreams.