Can You Still Buy a Home with Poor Credit?

Image courtesy of Graur Razvan Ionut at

Image courtesy of Graur Razvan Ionut at

Buying a home is a major financial endeavor. For most of us, it is the single largest purchase we will ever make in our lives. Very few buyers have enough cash to buy the house outright, so most of us look to a mortgage lender for a loan to make up the difference. But what if you have bad credit? Can you still get a mortgage?

Improve Your Credit

The first thing to do if you have poor credit is to take steps to improve it. While some problems can take as long as seven to ten years to fix, you can make some shorter-term fixes as well.

Start by paying off any credit card balances you have. Paying off high balances shows lenders that you are serious about fixing your credit and will improve your score within 1-2 months. If you have any outstanding collections or public records, be sure to take care of those as well. Some collections can be removed from your credit history when you settle or pay, but that is not always the case.

For the long-term, you should also take steps to remove late and missed payments from your history. To do that, close any credit accounts with negative history and wait for the seven years to go by for the account to drop from your history. Be sure to keep any accounts with a perfect history open, as having a long history of on-time payments is one of the biggest factors in your credit score.

Save a Bigger Down Payment

A bank may not want to loan you $250,000 for a home, but may be willing to give you $150,000 or $200,000. One way to make up the difference is to save a bigger down payment.

When approving a loan, banks and credit unions look at your credit history and the home itself. One of the calculations the bank will run is a loan-to-value for the property. In the event you stop paying your mortgage, the bank can seize the home and is more likely to give you a loan if they are certain they will get their money back.

If you buy a house with a bigger down payment, the loan-to-value will be more favorable to the bank and they may be more likely to offer you a loan.

Find a Less Expensive Home

While no one likes this option, sometimes you may just have to find a less expensive home. Buying a home with a lower sticker price improves the loan-to-value ratio, particularly if you have a solid down payment saved up.

To find a cheaper home, consider finding a similar sized home in a less desirable area. You may find a home you love near downtown for $500,000 that costs quite a bit less in the suburbs. You can also look for a smaller home or a fixer upper if you are set on a specific location.

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