When it comes to buying a home, having bad credit is not the end of the world. Your future doesn’t have to be defined by your past. Whether you have suffered from a bankruptcy, foreclosure or some type of financial hardship that resulted in late or missed payments, there are lenders who specialize in financing for those with less-than-perfect credit. You will likely have to produce a larger down payment and/or pay higher interest rates than someone who has good credit, but the important thing to know is that buying a home is an option for you.
Bankruptcy & Foreclosure
If either a bankruptcy or foreclosure is on your credit report, it could take some time before you can qualify for a good interest rate on a mortgage. FHA loans, which are especially desirable for those with past credit problems and first-time home buyers, are backed by the government and offer a low down payment and interest rate option for those who qualify. Although the notation remains for up to 10 years, individuals with a bankruptcy or foreclosure on their credit report may qualify for an FHA loan after two years. Some mortgage lenders may approve a loan sooner, but the interest rates will be higher and the required down payment may be as much as 35 percent of the purchase price of the home.
Cleaning Up Your Credit
Even if you have bad credit, it’s important to check your credit report from each of the three major credit reporting agencies - TransUnion, Equifax and Experian - before applying for a loan. If anything is inaccurate, file a dispute with the reporting agency and request a correction. You can request a free copy of your credit report every 12 months.
In addition to correcting any inaccuracies on your credit report, it’s important that you know what can help or hurt your chances of obtaining a loan. You can start improving your credit by avoiding the temptation to apply for new credit right before submitting a mortgage application. Multiple inquiries will cause your FICO score to drop, and lenders will rely on this information when deciding whether or not to issue your loan and how to calculate your interest rates. With past credit problems, most lenders will want to see that you have rebuilt your credit history with 1-3 major credit cards and timely payments over a two-year period.
When it comes to obtaining a home loan, a healthy bottom line will help the lender to see you as being creditworthy. It’s important that you have sufficient income, along with the ability to prove steady employment for at least one year (longer is better) preceding your loan application. Most lenders will request a copy of your tax returns for the two most recent years, along with current pay stubs. If you have money for a down payment, this will also work in your favor.
In some cases, a conventional mortgage loan may not be available no matter how hard you try. Owner financing is one way that individuals, who may not otherwise qualify for a traditional mortgage loan, can purchase a home. This type of financing is offered by the owner and may include interest rates comparable to other loans, flexible down payment options and no credit check. Your REALTOR® can assist you in finding homes that offer alternative financing options.