Although recent changes to lending requirements for buying a home have made it more difficult to get a loan if you have bad credit, it is not entirely impossible. Even if your credit score falls well below average, you still may be able to qualify for a loan. However, there are some important things that you need to be aware of before you apply. The following section outlines some of the key considerations that come into play when applying for home loans with bad credit:
1. Realize that you will most likely have to pay a high interest rate. Most loans that are given to borrowers with bad credit are not ideal in terms of interest. A higher interest rate could add hundreds of dollars per month onto your housing payment. You need to factor this in when determining how much you can afford. You also need to decide whether or not it is worth it to you to pay thousands of dollars more over the life of the loan rather than waiting until your credit improves to buy a home.
2. You may need to save a larger-than-average down-payment. While typical home buyers can get by putting 20% or less down on their home, if your credit is bad, you may need to substantially increase your down-payment. Sometimes banks will be more willing to work with you if you have a lot of money to put down. In their eyes, you are less likely to default on the loan if you have a lot of your own money invested in the property.
3. Some lenders may require you to undergo counseling on home-ownership before giving you a loan. Borrowers with bad credit often have to participate in this counseling to get a better idea of what all is involved in owning a home. Typically, the counseling is available online, meaning that you can do it from the comfort of your own home.
4. Your debt-to-income ratio weighs heavily into whether or not you will be approved for a loan. Lenders like to see a low debt-to-income ratio — particularly when giving loans to people with bad credit. You can improve your chances of getting approved for a loan by paying down your debt as much as possible before applying. Alternatively, you can also increase your income to lower the ratio. Either way, try to get your monthly debt obligations as low as possible in comparison to your income.
5. Realize that you may have limited options in terms of lenders. Most big banks won’t lend to borrowers with bad credit. You may need to look at credit unions, smaller local banks or government-backed programs such as FHA to find bad credit home loans.
Getting home loans with bad credit is possible. However, it does take some creative thinking to find someone who is willing to lend to you. Additionally, you need to realize that you may not get the most favorable terms on your loan.