Buying A House With Bad Credit - Part 2
Option 1: FHA LoansFederal Housing Administration (FHA) loans should be your first option. These loans are designed for people with bad credit and low incomes. FHA loans are insured by the federal government, so lenders have protections in place in case a borrower fails to pay, making them more willing to accept risk. This means that you will be able to obtain a loan if you meet certain other conditions. When applying for an FHA loan, the government will look for the following criteria:
Employment history (steady employment required)
A valid Social Security Number
A 10% down payment for those with bad credit scores
Property appraisal by the FHA
Even those with a shaky financial history can still qualify if they can offer a larger down payment for the home and the home meets FHA standards. FHA loans must also carry homeowner's insurance for the lifespan of the loan. An FHA loan will allow you to purchase a home even with bad credit but do expect that it will ultimately be more expensive than it would otherwise be if you had a better history. Cash becomes far more important in this process than creditworthiness.
Option 2: Operation HOPEThe international organization Operation Hope is designed to help those with limited borrowing capacity to obtain money to buy a home. The organization runs several programs for potential home buyers, including access to FDIC-backed loans, first-time homebuyer's programs for those with low incomes and counselors who will help those with a low income and bad credit find the means to purchase a home. HOPE says it focuses on all the following areas:
Loan products from FDIC-insured financial institutions
FHA loan programs
Down payment assistance programs
Teams of professional realtors committed to working with our clients
First-time home-buying programs designed for those with low or moderate income
Operation HOPE has helped low-income individuals secure home loans for as low as 0% to 3.5%, which is usually only available to those with long and stable financial histories.
The biggest drawback for HOPE is that it is not located everywhere. Locations are limited across the U.S. You may have to wait some time before you can get into a home, as Operation HOPE may have you complete a counseling class before they assist you in buying a home.
Option 3: Apply For A Regular Loan, But Come Ready To Pay MoreThis is an option for those who have a good work history and income. Lenders are always willing to deal with those who have more cash on hand and who are prepared to pay out. If you can purchase a home with more cash on hand, you'll be able to do the following:
Offer a larger down payment. This could be anywhere from 10-20% or more. The larger the down payment you're able to offer, the better chance you'll have of getting the lender to provide you with a loan.
Offer to take a higher interest rate. If lenders believe that you'll be able to pay on the interest (again, work history and down payment will influence this), they may be willing to still offer a loan, but with a much higher interest rate than generally advertised. You'll have to deal with this for some time, but you can work on improving your record after you're already in the home, and seek to refinance and lower that interest rate down the road.
Option 4: Improve Your Record FirstWhile you may be anxious to get into a home, sometimes the drawbacks of the other options may not be appealing. If you feel the cost burden of the other options is too much, it may be in your best interest to rent instead and work to build your credit score. This will include credit counseling programs, and targeting the areas of your score that give you the most opportunity for improvement. With a focused rebuilding plan, particularly one emphasizing credit card utilization and on-time payments, you may be able to raise from "bad" to "fair" within six months to a year. This will immediately give you more loan options.
A bad credit score closes doors, but with strategy, you can open many other doors and help to reopen those doors that were closed off to you. Getting into a home will take more time, but it is possible. Many programs and options exist, and with effort and persistence, you can have a home of your own.