I would like to buy my first home. I have been cleaning up and paying down my credit. My score is going up but I still have delinquencies on my report. Can I buy a house with bad credit?
You may be able to buy a house with poor credit, but it may be better to take some time to improve your credit first. In order to qualify for the best mortgage rates you likely will need to have a very good to excellent credit score (typically mid-700 and above).
Fannie Mae and Freddie Mac are financial services corporations that buy mortgages on the secondary market. They specify the credit scores required for them to purchase those loans from your mortgage lender. There are options for people who have had credit troubles in the past, although in most cases those options will mean having to pay more to secure the loan, whether in the form of higher interest rates and fees or a larger down payment, or perhaps both.
Buying a home when you have bad credit
There are some loans, such as FHA loans, that are available to individuals with credit scores that are lower than what may be required for conventional financing. Your mortgage lender can discuss specific options for which you may qualify.
Although these loans are typically associated with higher fees, they can be beneficial for those who are ready for home ownership but could not otherwise qualify for the loan they need. According to the Federal Housing Administration (FHA) as of the publication date of this article:
- FHA mortgage loans require a minimum of 580 or higher with a 3.5% down payment
- For FHA applicants under 580, qualification for a loan is still possible, but a 10% down payment would be required along with meeting other requirements. See FHA's site for more information.
In some cases, lenders may be able to do a manual review of your credit report in order to help approve you for a loan. For instance, if you have poor credit due to extenuating circumstances such as medical bills, your lender may take that into consideration.
Providing alternate financial records that show you have overcome credit difficulties might also be an option. Mortgage lenders may be able to use rent, utility or other payment records that demonstrate financial responsibility over months or years to offset a poor credit history.
Having a high income or being able to come up with a larger down payment can sometimes help to offset the risk posed to lenders by a low credit score.
Discuss your options with a mortgage professional
If you have a less-than-stellar credit history, but still feel you are ready to buy a home, you should talk with your lender or other mortgage professional to discuss your circumstances and go over the options available to you. A mortgage interest rate that is just a few points higher can cost thousands of dollars over a 30-year repayment period.
Delaying your home purchase for a few months or perhaps longer while you rebuild your credit history may be a better choice. Get a copy of your credit report and credit score. You should also receive the risk factors that go with that score.
The risk factors describe what is most affecting your credit scores. Address those risk factors and you will be able to improve your credit scores over time, perhaps sooner than you think. Holding off on that mortgage loan a bit could save you a lot of money and help you better afford the home of your dreams.
Thanks for asking,
Veronica Herrera, Director, Product Management