If you’re young and haven’t built up credit, or have had a few lapses in your credit history, you may be wondering if you can still buy a home. The short answer is, “Yes, it is possible to buy a home with bad credit”, says Realtor.com writer Cina Coren.
It’s optimal to have a long, clean, credit history if you want to purchase a house because it makes it easier to get approved for a home loan, and it can help you secure lower interest rates.
The best way to go from “bad credit” or “no credit” to “homeowner” is to take a year or two to build up your credit score.
Here are some of the best ways to build up your credit:
1. Do you understand your credit score?
Make sure that you understand your credit report and your credit score. You can request a credit report from all three major credit agencies (Experian, Equifax, and TransUnion). Your credit score is the first thing lenders look at when assessing whether or not you qualify for a home loan. Check these reports to make sure that all of the information contained is accurate; if there are any errors, you can report them to whichever agency the report came from. Correcting errors on your report will actually help boost your credit score (if there are any errors)
2. Assess your finances
You can do this by calculating your “debt-to-income” ratio. Do this by adding together all of your debt payments (car payments, credit card payments, tuition, etc.), including the loan you’re applying for. Then divide this total by how much money you have to spend on living expenses each month (after debt payments). Having a score of 40% or lower means that you may be able to qualify for a loan. Higher than 40% means you need to readjust your spending habits (or make more money).
3. Good Spending Habits
The easiest way to improve your credit score is to practice good spending habits using credit. Make sure that you’ve paid off all credit cards each month. Use your card 1-3 times a month to make small purchases, like lunch or gas, and then pay it off completely, if possible. If you don’t have a credit card, get one! (If you have no credit, you will most likely need to apply for a “secured” credit card through your bank).
If you simply cannot wait a year or two to boost your credit, you can apply for what’s called a “bad credit home loan” or a “subprime” loan. Subprime loans come with extremely high interest rates, so take into consideration how much you’ll have to spend on monthly mortgage payments PLUS interest before deciding whether or not you can afford a home.
Whether your credit score is good, or not so good, you need a real estate agent who can give you the right information so you know your options. Call me, Judy Gang, I am happy to help you!