Can You Buy a Home With Bad Credit? Experts Say, Maybe

Discover Proudly Amplifies Diverse Voices

Sign-Up for a free subscription to The Black Wall Street Times‘ daily newsletter, Black Editors’ Edition (BEE) – our curated news selections & opinions by us for you.

If you dream of owning your own home but worry about your less-than-perfect credit score holding you back, it may be wise not to lose hope just yet. Contrary to what you might think, it is possible to buy a home even with bad credit. Here is a breakdown of what some experts have said.

What is a credit score?

Lenders look at your credit score like your financial report card. It’s a number that represents your creditworthiness and can range from 300 to 850. Generally, a credit score below 620 is considered “bad” or “poor.” Factors like late payments, high credit card balances, and past bankruptcies can contribute to a low credit score.

Consider improving your score first

The good news is that your credit score isn’t set in stone, and you can work hard to get it where it needs to be. Before buying a home:

1. Start by checking your credit report for errors and dispute any inaccuracies you find.
2. Focus on paying your bills on time and reducing your credit card balances.

Slowly but surely, your credit score can rise, making you a more attractive candidate for a mortgage. Buying a home with a low score is possible, but you are more likely to get a better rate with a higher score.

While your credit score isn’t the sole factor lenders consider during the loan application process, it does play a pivotal role as a primary risk assessment tool. This could be an option if your credit score isn’t as stellar as it should be.

Save for a larger down payment

Consider saving for a larger down payment if your credit score is low. A larger down payment can compensate for a lower credit score. Lenders may be more willing to work with you if you can put down a substantial upfront payment. Plus, a larger down payment can lead to lower monthly mortgage payments.

Explore FHA loans

The Federal Housing Administration (FHA) offers loans that are accessible to borrowers with lower credit scores. These loans require a smaller down payment and have more flexible qualification requirements.

FHA loans also provide the flexibility of accepting credit scores as low as 580 with a down payment as low as 3.5 percent or even as low as 500 with a 10 percent down payment. These loans typically offer competitive interest rates, often slightly lower than those of conventional mortgages, though the trade-off is that they may have a higher annual percentage rate (APR).

The downside to this deal is that you will be required to pay mortgage insurance. Loans that specifically cater to Black and minority homeowners are also invaluable in the home-buying process. Niche programs like the Special-Purpose Credit Programs are also a valuable tool for homeowners who have the shorter end of the stick credit-wise.

Consider a co-signer

If your credit score is exceptionally low, consider asking a family member or close friend with a good credit score to co-sign your mortgage. Doing this can give the lender more confidence in your ability to repay the loan on time.

Shop around

If you’re a first-time homebuyer or meet the criteria for low-income loan programs, there are alternative choices available apart from traditional loans. VA and USDA loans do not need a strict credit score requirement, so it’s a good idea to ask your lender about your eligibility for these options.

Also, consider exploring programs such as Fannie Mae HomeReady, Freddie Mac HomeOne, Home Possible, and various first-time homebuyer initiatives to widen your home financing options.

Ask about a rescore

Changes to your credit report can take some time to process, which may mean the improved credit scores won’t show up in time for your mortgage application. You might consider a “rapid rescore” through your lender in such situations.

A rapid rescore is a service that allows your lender to provide evidence to a credit agency that you’ve recently made updates or changes to your account that haven’t yet been reflected in your credit report, as explained by Experian.

Borrowers can’t directly request a rapid rescore; this service is exclusively offered to lenders. While a rapid rescore is expensive, it can be a worthwhile investment because the lower interest rate you could secure may offset the fee for updating your credit information.

The author’s content and opinions have not been pre-reviewed, approved or endorsed by Discover.