Life can be somewhat of a numbers game. You need to be a certain age to drive and to drink alcohol, you need to have a certain grade point average to get into your dream university, and you need to make a certain income to live the lifestyle you’ve always wanted. Then, let us not forget, the dreaded credit score, a number which not everyone even knows exists. You have always been told that you need the perfect credit score to get that dream house, but is it necessarily true? Well, rest assured, you have some options that can make it possible to buy a home with bad credit.
Understanding Your Credit Score
First off, it’s important to understand what a credit score is in order to understand why it is making home buying more difficult. As one of the main factors in determining whether or not you qualify for a mortgage, the higher the credit score the better. Your credit score is basically split up between your payment history (whether you make payments on time), length of credit (the earlier you started accumulating credit, the better), debt-to-credit utilization (your debt amount divided by your credit limit on the sum of your accounts), credit mix (a combination of all your different credit types, i.e. credit cards, car loans and retail accounts) and new credit (every time you apply for a new account is a hit against you). Don’t worry though; even if you have awful credit and $20,000 left to pay on your credit card, you can still purchase a house. You will just have to put a little more prep work in at the starting gate.
What If I Have a Low Credit Score?
If your credit score is pretty low, you’ll need to gather up a large down payment for that house you want. Offering a down payment of at least 20 percent of the home value (or even more) basically tells the lender that though you might have a low credit score, you are fully capable and ready to take on the responsibility of the loan. After all, if you were not ready to take it on, you would not exactly be investing more up front, would you? Making this move will also increase your equity up front, which will lower your loan-to-value ratio.
Improving Your Credit Score
Improving your credit score can have a major impact on whether or not you will be able to score a loan, so you should start preparing for this at least a year before putting the purchase in motion. You can start by paying of your debts (or as much as you can manage) and getting your credit card balances as low as you can. Do not switch jobs; stick with the one you have for as long as you can, as some lenders require two years of steady employment with one company to qualify.
Hard Money Loans
You can also apply for a hard money loan, since these are generally short-term. Though they come with a high interest rate, you are able to make the home purchase much quicker than with a standard loan since the funds become available immediately. For instance, say you are looking for a home in Northern California; accessing San Francisco or Sacramento hard money loans can give you the upper hand in areas like these that see fierce competition. If you are completely confident that you will be able to renovate a home quickly and make more money at the end through a fix and flip venture, a hard money loan is a great option to pay for the house itself, along with the renovation costs. The catch with hard money loans? You have to know what you are getting into and have an action plan for paying them off.
Don’t let bad credit prevent you from purchasing your dream home or an investment property. Keep these tips in mind—don’t let your credit score rule your life!