Some unfortunate events in your life can impact your credit score badly. However, people tend to bounce back from them quite quickly. The problem is that their credit score cannot bounce back at the same pace. This brings us to the critical question, how to buy a house with bad credit but good income?
Is it possible? Yes, it is! We will today share with you the way to do so. It means that as long as you have appropriate income, you can buy a house.
Why Is Income More Important Than It Used To Be?
Earlier, lenders use to take into account not just your income but also your credit score while deciding whether you can get a loan for buying a house or not.
In the year 2014, the government stated that the lenders take into account Federal ability to repay. Ever since then, the emphasis on the income of the borrower has become quite important. According to the industry standard, if the borrower can pay his mortgage payments, they have to approve his mortgage.
For the traditional mortgage, this standard certainly applies. It, however, does not apply to timeshare, reverse mortgage, or any other kind of financing.
It does not mean that the lenders will completely ignore the credit history of the borrower. However, in most cases, equal or more importance is given to the borrower’s ongoing income. That is why it is more important to have a good income than it used to be earlier.
How Can You Buy A House With Bad Credit?
When you’re looking to buy a house with bad credit, you can opt for the lenders who lend to such individuals, FHA loans, VA loans, USDA loans, and so on.
We will go into the details of all these loans below. Apart from this, you can search for the local and federal programs as well. These lend to individuals who have a good income but might not have an ideal credit score.
Not only that, another alternative which you have is to improve your credit score as well. We understand that this might take time. However, in today’s article, we will share with you a few tips which will allow you to improve your credit score quickly.
In a nutshell, once you go through this article, buying a house with bad credit will indeed become easy for you.
Home Loan Options For Bad Credit
We will go into the details of all these home loan options below.
1. Conventional Loans
The general perception among homebuyers is that you need to have a specific credit score to get a mortgage loan. That is not true.
Most lenders take into account various parameters to decide whether they will approve your application or not. One of the primary criteria for the same is good income. In our case, good income is a criterion that you can easily fulfill.
When you have a good income and even a credit score of around 600, it will become easier for you to get a conventional loan. While not every lender will approve, a few conventional lenders can approve easily if you have good enough income.
That is why, instead of thinking that no lender will approve your application, it is a good idea to apply to conventional lenders for a mortgage loan.
2. FHA Loans
FHA stands for Federal Housing Administration. This department backs an FHA loan. If you haven’t purchased a home in the last three years, you can certainly get such a loan.
The credit score which you need to get an FHA loan is 580. That is much lower than the usual score, which most lenders expect you to have.
If you are okay making a 10% down payment, then even if your credit score is 579, you can still get an FHA backed alone.
You need to, however, understand that FHA might have some other requirements. For the same, you have to go through the FHA website to know the exact details.
Only when you’re purchasing your primary residence with an FHA loan can you get approved.
Thus, if you haven’t bought a home in the last 3 years, an FHA loan can undoubtedly come to your rescue. It is one of the best options to buy a house with bad credit.
3. VA Loans
Are you a veteran?
Do you belong to armed forces?
VA loan is available to both these types of individuals. The VA loan has the backing of the Department of Veteran Affairs. However, you can avail this loan only when you meet one of the above criteria.
The good news is that the department also provides loans to spouses. You will not have to opt for any down payment when you’re getting such a loan.
Once again, there are a few criteria that you have to abide by to get such loans. The credit score which you will need is 620.
As long as you have a 620 credit score and meet the above criteria, you can undoubtedly opt for VA loans.
4. USDA Loans
USDA is another loan that you can avail if you have bad credit but good enough income.
USDA stands for United States Department of Agriculture.
In case you’re buying a home in a rural area, you can avail of this loan. Many times, when you qualify for this loan, you will not have to pay anything in a down payment. It means that you can buy a house with a $0 down payment.
In most cases, when you’re availing such a loan, the credit score can be 640. It means that with average or bad credit as well, you can avail this USDA loan.
Thus, when you’re looking to buy a house with bad credit but good income, you can certainly choose between these 4 options. With the help of these 4 options, it will become easier for you to buy a house.
Of course, you will have many other questions when you’re looking to buy a house. We will answer all of these questions below.
How Does Bad Credit Affect a Home Loan Application?
Even though over the years, the importance of credit score has certainly reduced but still, lenders do consider the credit scores of borrowers. Other essential factors include loan to value and debt to income ratios. In addition to these two ratios, the credit score is considered.
Due to the same, if your credit score is too low, lenders might reject your mortgage loan. However, if it is above 600, it is certainly possible for you to get a mortgage loan.
Only when your credit score starts to drop below 550, your chances of getting a mortgage loan decrease significantly.
With the help of the options which we have highlighted above, it is still possible to gain a mortgage loan.
What Credit Scores Needed To Buy A House?
The credit score you need to buy a house will vary depending on the type of loan you are availing. These include:
1. Conventional loans
The minimum credit score which you need for availing the conventional mortgage loan is 620. If you have a credit score in that range, you can easily avail the loan.
2. FHA loan with 3.5% down payment
In case you are availing FHA loan with a 3.5% down payment, the credit score can be as low as 580 points.
3. FHA loan with 10% down payment
In case you have a still lower credit score, you might increase the down payment up to 10%.
When you increase the down payment up to 10%, you can get approval with a credit score above 520.
4. VA loan
One of the main advantages of the VA loan is that there is no minimum score. However, most lenders will still prefer applications with a credit score of at least 600.
Thus, depending on the type of loan you are availing, the credit score requirement can change.
How To Improve A Bad Credit Score?
To improve your credit score fast, you can:
1. Verify all your accounts
You have to go through all the accounts on your credit report. You have to go to the payment history tab. You have to ensure that every one of your current accounts is reporting to your credit bureau. Only then can you be sure that your repayment history will be reflected in the credit bureau. When that happens, it is easy to improve the credit score.
2. Report the data inaccuracies
Inaccuracies are pretty common in credit reports. You have to dispute them when you notice one. Once you dispute the inaccuracies, your credit score will improve after the lenders correct.
3. Opt for Grace period
Once you speak with the lenders, it becomes easier for you to get a short grace period. When you get a grace period, the late payment will not be reported to the credit bureau. In that case, your credit score will not be downgraded.
Moreover, if you get a little grace on a current late payment, it will become easier for you to improve your credit score.
4. Settle collections
In case any of your lenders have hired a collection agency, you need to settle with them. Similarly, you need to settle credit card charges. Once you do so, you can improve your credit score.
- Reduce the debt utilization ratio:
Ideally, your debt utilization ratio should be under 10%. If not, you should try to keep it under 30%. Once you lower the debt utilization ratio, your credit score will undoubtedly jump.
With these 5 tips, it will become easier for you to increase your credit score pretty fast.
Local And Federal Assistance Programs
The programs which can help first-time home buyers are:
1. Fannie Mae’s HomeReady loan
This is another program that first-time homebuyers can use. The higher loan-to-value ratio ensures that you will not have to make a large downpayment.
The advantage of this program is that it offers meager interest rates. Besides that, it has little to no risk-based price adjustment. The mortgage insurance cost is also low.
The minimum credit score requirement is 620.
Thus, this program can certainly come to your rescue if you have a credit score in this range.
2. Freddie Mac’s Home One and Home Possible loans
The advantage of this program is that it requires very little down payment. The down payment can be as small as 3%.
The program is suitable for low-income individuals.
The program can offer up to 97% loan to value. It means that the overall amount which you have to fork out is limited.
The minimum credit score which is required for this program is 660. In case you have a credit score of around 680, you can get even better terms.
The low down payment requirement makes it a good choice.
3. Good Neighbor Next Door
The program which we are highlighting now is backed by the Department of Housing and Urban Development. It offers discounts to law enforcement officers, firefighters, teachers, and emergency medical professionals.
The department has marked certain revitalization areas. If anyone in these professions purchases a home in those areas, you can get a 50% discount on the home. The only requirement is that you should live in that home within 36 months.
Thus, it might not be a direct loan program, but it does provide you with a 50% discount on the home price.
4. Energy-efficient mortgage (EEM)
An energy-efficient mortgage (EEM) is a loan on offer for individuals who plan to make upgrades to their property to make it more energy-efficient. The good news is that you get a loan upfront.
Once you commit to such upgrades, you will not have to make a sizeable down payment.
The loan is backed by FHA or VA loan programs. It means that you can combine it with those programs easily. That is why it is one of the best federal programs that can lower the down payment and get a large upfront loan.
5. Native American Direct Loan
The Native American Direct Loan program, which we are highlighting now, is suitable for Native American veterans. It provides financing to them and their spouses to buy a home or even build one or improve one. The only requirement is that the land in concern should be federal trust land.
With the no mortgage insurance requirement and no down payment, it is undoubtedly a lucrative program for Native American veterans.
These are the 5 federal programs that you can choose from to buy a house with a good income but bad credit. These programs are designed for first-time house buyers.
How To Avail Of a Mortgage If You Still Don’t Get Approved?
Even after trying with the above few lenders and programs, still, if you’re not able to avail of a mortgage, there are a few tips that you can follow.
We will share with you these tips below.
1. Inquire from different lenders
The 1st thing which you need to do is to inquire from different lenders. Only once you do so will you know about the income requirement and the credit score required by most lenders. When you do so, it is easy to find a lender who can approve your mortgage application.
2. Get someone to co-sign
Still, if you cannot avail mortgage loan, it is a good idea to get someone to co-sign. When you co-sign with someone else who has an excellent credit score, your application’s average credit score will undoubtedly increase. In that case, it will become easier for you to get a mortgage loan.
The reason for the same is that already, you have a good income, and the co-signee has a good credit score. It means that the strength of your application improves significantly.
3. Get downpayment assistance
Many programs allow you to increase your down payment. Once your downpayment is more, getting a mortgage loan is undoubtedly possible. You can avail of grants as well as credits for the same. It is another way in which you can get your mortgage loan approved.
4. Increase down payment
In case you have saved up for a down payment, you have to wait a bit more to increase the downpayment. Once you make the downpayment up to 20%, many lenders will approve your mortgage application.
5. Avoid big purchases
Any new loan associated with the recent purchase will reduce your probability of getting a mortgage. That is why you have to avoid availing of a new loan or to make a new purchase or avail a new credit card.
It will ensure that your chances of getting your mortgage loan increase substantially.
These are the additional tips that can help you get a mortgage loan.
We will now share with you answers to some FAQs to make it easier for you to buy a house with bad credit but a good income.
Frequently Asked Questions (FAQ)
Yes, you can get a home loan with a 500 credit score if you make a sizable down-payment. By sizeable, we mean that you might have to make a down-payment of 40% or more. Alternatively, you can also get a cosigner who has an excellent credit score. In that case, you can get a home loan with a 500 credit score.
500 is the lowest credit score with which you can get a loan for purchasing a house.
If you have terrible credit, you need to make a sizable downpayment, get a cosigner or use a federal program to get a home loan.
To improve the credit score quickly, you need to settle the disputes, settle with collection agencies, report inaccuracies, and so on.
Thus, if you’re looking to buy a house with bad credit but good income, our guide above will undoubtedly help you out. With the help of our detailed explanation and coverage of various programs, you have a blueprint to get the mortgage loan approved.