One of the things they (the ubiquitous, authoritative “they”) always tell you when you are thinking about buying a home is that you should make sure your credit is in great shape before you even try to prequalify. As a general rule, you need good credit to buy a home. The better credit you have, the quicker you will be approved for a mortgage and the better interest rate you will get on your loan. What if, however, you want to buy NOW and you have less-than-stellar credit? Maybe you have made some good choices in your life and have the financial means to own, but your FICO score hasn’t caught up with your income due to bad decisions or unfortunate circumstances in the past. Can you buy a home with bad credit? The answer is more complicated than a simple “yes” or “no.”
First of all, how “bad” is your credit exactly? FICO scores go up to a “perfect” score of 850, but only 0.5% of consumers will attain that magical humber. A score above 750 is considered to be great credit, and is really the number you want to shoot for when applying for a loan. That’s not to say that other options aren’t available. If you have a credit score of at least 680, which is considered to be fair credit, you will still find conventional lenders looking to give you a loan. You will just pay more for it. You’ll have to look harder for a loan at 620, and it will be expensive, but it can still be done. Then there’s an FHA loan, which is issued through the federal government. The lowest score for one of these mortgages is 580, with a 3.5% down payment. That’s the bare minimum. A credit score of 580 is not considered high by any means, so yes, you can still get a mortgage with sub-prime credit.
If you have low credit and want to buy a house, the best thing you can do is take steps to rehabilitate your score. Get a copy of your credit report from each of the three major bureaus and check it over thoroughly for mistakes. If you see any entries that you know don’t belong to you, take steps to get them removed. If you have outstanding debts, look into paying them off. A big issue for a lot of American families is credit card debt. If you are in over your head with the plastic, consider looking into credit counseling to find ways to better manage your finances. Keep in mind that this is not the same as debt management, which usually costs a lot of money and involves taking steps to consolidate some of your debt.
While it is possible to buy a house with subpar credit, it is an expensive and difficult proposition. If you can, the best thing to do is work on your credit and wait until you are in a better place financially before you take the major step of applying for a mortgage.
