Well, guess what? The good news is that you CAN buy a house today even if you have poor or bad credit! The bad news is may take a little work but I’ll help you get there.
I’m going to breakdown 4 easy steps we recommend at Shiloh Street Real Estate that you can follow to get your credit back on track and make yourself eligible to buy a house as soon as possible.
Don’t jump ahead but step #4 is a bonus step that will show you how you may be able to buy a house even before your bad credit gets fixed. Yes, there are ways to do it and I’ll show you how.
Enough chit chat, let’s get to it….
Step #1 – Figure Out the Cause of Your Bad Credit
You should already know the reason you have poor or bad credit but if you’re unsure, find out right away. You can simply pull your credit for free at a site like CreditReport.com and find out what issues need fixing.
You’ll want to look for things like late payments, past due amounts, charge offs, repossessions and reporting errors. Many times you’ll find that your bad credit is due to credit reporting errors, which simply isn’t your fault but can be fixed.
Step #2 – Start Fixing the Problems
If the only cause for your bad credit is credit reporting errors, you’ll want to contact the 3 major credit bureaus (Experian, Equifax and Transunion) and dispute the incorrect items on your credit report. It may take a couple months to get the errors cleared off but that’s the only way to do it.
More than likely, if you’re wondering how to buy a house with bad credit, you’re probably facing one of these 5 credit problems….
2) Late Payments
3) Past Due Payments
5) No Credit at all (which is almost as bad as having poor credit)
Here’s how to fix each of these 5 common credit issues:
Bankruptcy – whether it’s a chapter 7 or 13, most mortgage lenders today want to see a 2 year minimum of clean credit history since your discharge date. So your best option is to just wait out that time period and then reapply for your home loan. But make sure you keep the rest of your credit squeaky clean in the meantime!
Late Payments – As with bankruptcy issues, mortgage lenders want to see a certain number of months or years in which you haven’t had any late payments on credit cards or other loans. Ask your lender what the time frame is that they require and most likely it’ll just be a matter of making your payments on time and waiting out that time period.
Past Due Payments – This is simple, right? Come up with the cash to get current on these bills. If you don’t have the full amount, try to work out a settlement with the lender. It’s better to make a settlement than go into collections. But iff you can’t get current, you probably have bigger problems than not qualifying to buy a house and you may want to get your finances in better shape before making the leap to homeownership.
Repossession – Just as with a bankruptcy, most lenders don’t want to see a repossession in the past 24 months. If you’re about to have a repossession, do whatever you can to avoid it. Try making other arrangements with the lender or sell the item and getting an unsecured loan for the difference of what you will owe. From a credit standpoint, it’s much better to have an unsecured loan than repossession.
No Credit at all – This is a surprisingly funny issue to a lot of homebuyers because ‘no credit’ doesn’t equal ‘bad credit’, does it? Unfortunately, the world revolves around the almighty credit score and if you don’t have one, nobody will lend you anything. But you can easily establish credit by getting a credit card and charging only a $50-$100/mo. on it. Just be 100% sure to pay off the balance in full each statement period and you should see your credit score rise gradually.
Step #3 – Re-Apply for Your Home Loan
Once you’ve worked on fixing the specific problem(s) causing your poor credit, keep an eye on your credit score until it gets around 680 or so. That’s typically the minimum credit score that mortgage lenders want to see these days in order to pre-approve homebuyers for their home loan.
Once enough time has passed or if your credit score has risen high enough, go back to your mortgage lender and reapply for your home loan. They’ll pull your credit report again and ask for income documentation. I know it’s a hassle but there’s no way around it.
If there are any remaining credit issues, they’ll let you know what needs to be done. But hopefully you’ll get a big fat ‘Approval’ for your home loan and be on your way to buying a house.
Don’t forget to ask your lender, “how much are closing costs when buying a house” and be sure to get a Good Faith Estimate (GFE) from them, which will outline your total closing costs. Plus, maybe you can teach someone else how to buy a house with bad credit!
BONUS Step #4 – Find a Seller Offering a ‘Lease-Option’ or ‘Land Contract’
Now if you’re savvy and determined to figure out how to buy a house with bad credit, you may be able to skip steps 1, 2 and 3. But let me warn you, it won’t be easy!
There are 2 ways you can make this work:
1) Lease-Option / Rent-to-Own – Find a seller who is willing to rent the home to you with an option to purchase it at a future date.
For example, you may need to wait 2 years for your bankruptcy to clear off your credit report so you can get approved for your home loan. Find a seller who will rent the home to you with an option to buy it at a set price in 2 years. This way you’ll have time to clean up your credit and get approved so you can purchase the home in 2 years.
By having an ‘option to purchase’, you’ll be safe knowing that no other home buyer can buy that house before you because you’ll have the first right to buy it at the price you already agreed to with the seller. That’s the benefit of having an ‘option to purchase’.
2) Land Contract / Owner Financed – Find a seller who is willing to act as the lender when selling the home.
For example, a seller may own his/her home free and clear with no mortgage. They may be willing to sell you the home and have you make payments to them for the purchase price. This is called buying a home on a ‘land contract’ or finding a seller offering ‘owner financing’ where they are basically acting as the bank for you.
In some cases the seller may be more flexible in allowing you to have a poor credit history while still agreeing to sell you the home and act as the bank. You may pay a slightly higher interest rate because of the increased risk to the seller but it could be well worth it if you’re getting a killer deal on the home!
Bottom line, when you’re figuring out how to buy a house with bad credit, you simply need to look at your specific situation, set goals and take action. Don’t lose hope because there’s always a solution to every problem!