The ability to buy a home is not compromised by poor credit, but the process will be more time-consuming and costly than it would be for those with stellar credit. Think about why you want to buy a home before looking for one.

Buying a home is a huge commitment that can be challenging to fund if your financial situation is precarious. If you have credit problems, it may be advisable to keep renting for the foreseeable future.

What Constitutes Poor Credit Standing?

Having bad credit means that your credit score or payment history falls below the minimum requirements set by your lender. While some mortgage companies have a minimum credit score requirement of 500 on a scale from 300 to 850, others require a score of 580, 620, or higher.

Lenders have different requirements for minimum credit scores since they do not all prioritize creditworthiness. For them, the most important thing is knowing that they will get their money back from you every month.

Allowable Mortgage Credit Score Minimum

There is no hard and fast credit score beyond which home loan approval becomes impossible, but a lower score makes it more difficult to locate a lender willing to work with you. Government-backed loans often have more lenient requirements regarding credit score thresholds than standard conforming loans, typically starting at 620.

Examine Your Options

It's important to shop around for a mortgage, as some lenders may be able to provide more competitive interest rates. To save thousands throughout a 30-year mortgage, shopping around and comparing rates from multiple lenders is recommended.

Think Outside The Bank

There are many different kinds of mortgage lenders available besides traditional banks; non-bank and online lenders, credit unions, and other lenders compete for your business. Encourage bids from multiple sources to determine which one offers you the greatest deal.

Affordable Housing For People With Low Credit Scores

Keep Your Current Spending Habits

To maintain a high credit score before applying for a mortgage, you should avoid making large purchases or opening new credit accounts.

Beware 'Guaranteed' Loans.

A red flag should go up if you encounter advertisements for mortgages that promise "assured" approval regardless of credit. A "guaranty" is illegal under federal law unless the lender has confirmed the borrower's ability to repay the mortgage. It's possible to get approved on these offerings, but only if you pay an exorbitant interest rate or some other form of premium.

Mortgage Loans For People With Poor Credit

Subprime Conventional Loan

Non-conforming conventional loans are available to borrowers with poor credit because they do not meet the guidelines Fannie Mae and Freddie Mac set forth. Those with poor credit histories or who recently filed for bankruptcy may consider this.

Federal Housing Administration Loan

Since the Federal Housing Administration insures FHA loans, banks are willing to lend money to borrowers with scores as low as 580 with a 3.5% down payment and as low as 500 with a 10% down payment. The catch is that you'll have to pay mortgage insurance premiums.

Low Credit Costs How Much?

Whenever you apply for a mortgage, your credit score is one of the deciding factors for the lender. However, it significantly affects whether you are authorized and the interest rate you are offered. Borrowers perceived as a lower risk are offered better mortgage rates. Lenders also look at loan-to-value and debt-to-income ratios, but credit ratings are crucial.

Improving Your Credit Score Before Buying

You can buy a home even if you have poor credit, and you can do it if your credit is good. Remember that your credit score is temporary, so you may improve it by altering your current habits. It's amazing how much a few tweaks can affect.

The time it takes to raise your credit score is not dependent on how quickly you need to buy a home (6 weeks, 6 months, or longer). Read more on credit repair methods to help you get into a home sooner.

Error-Check Your Credit Report

Even though almost a third of credit reports have mistakes, you've probably never seen your mortgage credit report if you've never applied for a mortgage. AnnualCreditReport.com lets you see a copy of your report before you ever apply. With an online mortgage pre-approval, you may also obtain your credit report.

Summary

Bad credit homebuying may not be the greatest option. FHA loans are fantastic for consumers, but revisions after the subprime mortgage crisis make them pricey. Before buying a home, prospective buyers should calculate how much better credit and larger down payment could save them.