Buy Your Dream House with a Low Credit Score
It’s nice to know that the large sum of money you’re spending on your home each month is going towards an investment.
If you rent a home or apartment, or condominium, however, your money is going towards your landlord’s investment, not yours.
Are you tired of paying someone else’s mortgage each month?
Then it’s time to consider purchasing a home of your own. Contrary to popular belief, you don’t need perfect credit to get approval for a mortgage. It helps, but it’s far from necessary.
If you currently have a low credit score, here are some strategies to help you purchase your first dream house:
Seek out FHA mortgages
The Federal Housing Administration doesn’t administer loans directly to buyers. They do, however, act as a liaison between private lenders and buyers by insuring government loans.
- Lenders are more likely to offer loans insured by the federal government to under-qualified buyers, often at a reasonable interest rate.
- FHA mortgages are geared toward buyers with characteristics other private lenders would find undesirable: low income buyers with lower credit scores or bankruptcies, and college graduates with little or no collateral.
- Down payments on FHA mortgages can be as little as 3.5%. This means a $300,000 house requires only a $10,500 down payment through an FHA loan, rather than the $60,000 required as the standard 20% from private lenders.
Use seller financing
A seller who finances their own home agrees to receive payments from a buyer directly, rather than having them negotiate financing through traditional lending institutions.
This is a boon for sellers dealing with overly saturated real estate markets that yield few qualified buyers and few substantial offers.
- Mortgage lenders are tightening their purse strings and creating impossible conditions for unconventional borrowers to meet. Thus, seller financing is becoming increasingly popular among home owners who want to sell.
- Seller financing sometimes requires a larger down payment to lower the seller’s default risk. Down payments between 30% and 50% of the purchase price are not uncommon.
- Also, sellers still charge interest on the homes they sell.
- As a buyer, you can make an offer more attractive to the seller by offering more for the home. If the home is listed at $300,000, offer $325,000. Such an enticing offer will attract a seller’s interest, and will only cost an extra couple hundred dollars per month.
- Always use the services of experienced real estate agents who are most familiar with these types of complicated financing options. They will be more able to guide both you and the seller through the details of escrow accounts, promissory notes, and all the necessary paperwork.
Work on improving your credit score
You want to buy a home right now, but you might be better off waiting for a better time.
Focus on improving your credit score in the next year, then resume your hunt for the perfect home for you and your family. A year can make a big difference in your credit score, if you work on the details with a financial advisor.
- Dispute errors on your credit report to increase your credit score, but keep your inquiries to a minimum. Of course, paying your bills on time helps too, particularly when it comes to student loans, car payments, and credit cards.
- Pay down your credit card balances. Lenders like to see you using less than 30% of your available credit balances, in general.
- Don’t deactivate old credit card accounts that you’ve paid off – keep them open with a $0 balance. This establishes a longer credit history and more available credit, both of which attract potential lenders to you as a lower risk for repayment.
You can still buy a home with a lower credit score, but it takes patience and research.
Be willing to consider one of these less conventional options, and dedicate yourself to improving your credit score over the next year. Your new home just might be within reach after all!