Did you know that 34% of Americans have fair or worse credit? About 39% of those people might not know if they could cover a sudden $400 emergency.
You can see how people could run into credit problems because of this and it can really cost you when you want to make a bigger purchase such as buying a house.
Some people may try to get a cheap first house, but that may not be enough. Here is what you can do as a first-time home buyer with bad credit.
Cash for Down Payment
This is one of the easiest ways to go about buying a house with bad credit. They say cash is king, and it certainly applies when buying a house.
Why? Because how much you can put down for the down payment on a house is valuable to the lender.
It means that they will have to give you less money and that you are very likely to pay less interest than someone who needs a bigger loan.
A threshold to this is to cover about 20% of the cost of the house on a down payment. Part of the reason for this is to avoid having to pay PMI (private mortgage insurance).
The majority of lenders will require you to pay PMI on your mortgage if you cannot meet a certain threshold for a down payment, which is usually 20%. The PMI covers them in case you cannot pay the mortgage loan back.
So, taking money off of the principal and paying enough off to avoid PMI is a good way to work around buying a house with bad credit.
No Credit Check Financing
There are options to buy houses where the seller does not require a credit check. These are usually real estate groups that buy and sell houses for cash and are in the real estate business on a professional basis.
It can be a great opportunity to find cheap houses for sale and perhaps present an option to flip the house in the process if you do not want to live there permanently.
The catch for these is usually a higher down payment requirement.
Finally, you have an FHA loan, which is backed by the Federal Housing Administration. Since this is backed by the government, there are a few more assurances but the price of getting one might be steep in some regard.
This does give first-time home buyers with bad credit a chance, but the mortgage insurance for this is steeper than a normal mortgage loan. For instance, you can pay 1.75% of the mortgage in mortgage insurance payments rather than a general average of say .5%.
If you do not have a credit score of 580, then you will likely need to have 10% of the price of the house as a down payment to get this loan.
Become a First-Time Home Buyer With Bad Credit
Having bad credit is not ideal, and it can make buying a house more difficult. However, you have options as noted above if you are a first-time home buyer with bad credit.
The most important thing may be trying to improve your credit score to increase your options. For more information, check out our Finance section.
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