home financing
Updated June 02, 2020

23 Home Financing Tips for People with Poor Credit

Mortgages

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Are you tired of paying rent? Is buying your own your house is something you are considering? Buying a home isn’t exactly a walk in the park nowadays, but to try doing that with poor credit makes it even more challenging.

Poor Credit?

Things like late or missing payments, high credit card balance, or filing bankruptcy can result in a bad credit rating. Likewise, not having a credit history or losing one’s job can affect one’s credit pretty badly.  For someone with poor credit, getting a loan is hard and usually interest rates are higher. If your credit has been through ups and down and isn’t looking great right now, this post will show you a few ways to finance your home.

#1 Check Your FICO Credit Score

The first thing to do before you formulate a plan for home financing is to know your credit score.

Good to Know:  In case you are not aware of this, the Fair Isaac Corporation designed the FICO software to calculate people’s credit scores. Scores range between 300 and 850, and people who have a score of 740 or higher are eligible for the lowest interest rates.

The median range is between 670 and 739; a score between 580 to 699 is below average, and 579 or less is poor.

What Can Affect Your Credit?

  • Note that your credit score can plummet due to factors like late or missed payments, unpaid accounts sent to collection, or an increased utilization ratio.
  • The lower your score, the harder it is to convince lenders to loan you a mortgage.

To find out what your FICO credit score is, you can take a free test at banks, credit card companies, credit unions, and similar organizations.

#2 Reconsider the Sort of Home You Want to Buy

If you have poor credit, you should probably lower your expectations as to what kind of home you want to buy. Buying a house you can’t afford will take a huge toll on yor income, leaving you unable to cover living expenses, some of which will increase over the years.

FYI: Remember that you don’t have to stay in a house forever; you can leave your dream home for when your financial situation allows it.

#3 Try to Buy for Less than You Can Afford

Generally speaking, it’s not a good idea to have a monthly payment that’s above 30% of your income. The advantage of taking a mortgage that’s on the lower end is that it will take you less time to pay it off.

Pro Tip: So, instead of spending 30 years stuck with the same home, you are better off finding a 15-year mortgage and hopefully buy a larger, better house by that point.

#4 Use a Home Financing Calculator

If you are considering taking a loan, home financing calculators make it easy for you to predict how much money you will spend each year on a mortgage. You simply enter data like the home’s value, the down payment, the loan amount and term, the interest rate, and the calculator makes a graph that shows you the evolution of your expenses over the years.

Good to Know:  You can get estimations of the taxes and fees, interest, and principal that you will have to pay each year until you are done paying the mortgage.

  • These numbers will give you a clear idea of what you can and what you can’t afford.
  • Run different scenarios on a home financing calculator and figure out which ones seem reasonable before you commit to a mortgage.

#5 Use Credit Sesame to Manage Your Credit

Credit Sesame is a mobile application that lets you track your credit score, understand what factors affect it, and protect your credit against data breach, theft, and other sorts of frauds.

How Does It Work?

Credit Sesame calculates a “FAKO” score which, like the FICO score, gives you an assessment of your credit’s situation. The essential monitoring functions are free, while the paid premium options offer a more in-depth analysis and reporting of your credit.

This is probably the safest free credit service around, and the one that cares the most about identity theft protection. If you want an easy-to-use way to keep track of your credit, Credit Sesame is for you.

#6 Increase Your Income

Whether your credit is good or bad, increasing your income should be one of your major financial goals. An increase in income does not directly improve your credit score, but it raises your chances of getting a loan.

  • As a matter of fact, income plays a significant role in the lending process, with lenders relying on ratios like debt-to-income to make their decisions.
  • Taking steps like negotiating a higher salary, landing a better-paid job, and building additional sources of income will improve your finances and increase your home financing options.

#7 Make Your Payments on Time

One way to improve your credit score is to avoid late or missing payments. Those can show up on your credit report for a long period and are taken as red flags by lenders.

Pro Tip: Set up reminders on your phone to make sure you never miss a payment, and your credit should improve over time.

#8 Keep Old Debt on Your Report

Some people mistakenly believe that having debt on your credit report is a bad thing.

Unless your credit history has some severely negative elements, having debt on your report shows lenders that you are capable of paying off your debts successfully. So there’s no need to try removing all of your past debts from your credit report – keep the good ones around to improve your chances of getting a loan.

#9 Keep Your Credit Card Balance Low

Having a high credit card balance (like $3000 for a $4000 credit card limit) tells lenders that you might end up defaulting on the next loan or credit card payment.

  • Having a high credit card balance will thus negatively impact your credit score, hence why you need to keep it low.
  • To lower your credit card balance, avoid using your credit card for all sorts of payments, see if you can raise your credit limit, or consider turning to a credit card issuer who offers lower interest rates.

#10 Pay Off Big Loans and Debts First

It’s preferable not to apply for a loan if you already have a big one you’re dealing with. Having several big loans at the same time can put you in serious financial trouble.

So if you’re currently struggling with debt, your best bet is to wait until you pay it off before taking a mortgage.

#11 Pay More than the Minimum Payment Due

The minimum payment is the minimum amount allowed by your credit card issuer. It’s enticing to pay just the minimum due to save some money in the short run while still paying a bill on time.

However, the interest that goes with minimum payment can quickly balloon over time. This, in turn, increases your credit card balance for a long period of time, which hurts your credit score. Making bigger payments helps reduce balance and interests, so that’s what you should be doing instead.

#12 Check Your Credit Report for Mistakes

it’s not impossible for a credit report to have an error or two in it, like incorrect payment status or outdated information. Mistakes left unchecked will affect your credit score, so make sure your report is completely free of them. If you find something incorrect, you should file a formal dispute with the credit bureau to fix it within 30 days.

#13 Ask a Credit Repair Company for Help

If you’re struggling to improve your credit, you can rely on the expert advice of credit repair specialists. They will assist you in removing negative items from your credit history and will file a dispute on your behalf.

But before you hire a credit repair company, make sure they are legit by checking online reviews and the Consumer Financial Protection Bureau’s complaint database.

#14 Get Different Quotes from Multiple Lenders

Going to just one lender means you are leaving money on the table. Chances are the first lender you go to won’t be offering the best deal around. Many homebuyers give up on rate shopping because they find it overwhelming. However, you could save up to several thousands of dollars by doing thorough research. So don’t settle on the first or second lender, and be sure to ask many lenders about their mortgages rates and fees to compare and find the best deals.

#15 Search for a Loan on Bad Credit Loans

As its name explicitly says, Bad Credit Loans is a home financing company that helps people with poor credit to get a loan.

How Does It Work?

  • You simply fill an online request form and an algorithm uses the data to find lenders with potentially fitting offers.
  • You then review and compare the suggestions to pick the one that suits you the most.

Using Bad Credit Loans can be a huge timesaver, as much of the busy work is automated.

Plus, you are under no obligation to accept a certain loan; it’s all up to you.

Read our in-depth review and learn more about Bad Credit Loans and search for loans that match your credit.

Sign Up for Home Financing Programs

To get the home you want, you have to look for any option that can help. Luckily, some programs were created to support people with poor credit.

#16 Sign Up for a National Down Payment Assistance Program

Some prospective buyers miss out on opportunities simply because they aren’t aware of them. The National Homebuyers Fund helps make houses more affordable by giving grants to homebuyers that qualify. The grant can go up to 5% of the mortgage loan, and the qualification guidelines are flexible.

#17 Sign Up for a Veteran Affairs Loan

If you served in the military before, this option can make a big difference. The biggest advantage with a VA loan is that there is no required down payment, which can make it a lot easier to get your home soon. Additionally, you don’t have to pay private mortgage insurance and the interest rates are quite competitive.

#18 Sign Up for The Good Neighbor Next Door Program

The Good Neighbor Next Door Program is designed by the US Department of Housing and Urban Development to offer incentives for purchasing homes in revitalization areas.

The amount of these incentives can reach an impressive 50% discount, which makes a huge difference. However, this program is not open to all professions; you have to be either a law enforcement officer, a firefighter, an emergency medical technician, or a teacher.

Good to Know: If you fall into one these professions, go to this page and find out what eligible properties are listed in your state.

#19 Sign Up for the Single Family Housing Guaranteed Loan Program

The US Department of Agriculture and Rural Development offers this program to citizens with low to moderate income and who are willing to live in rural areas. Applicants must meet requirements like, among other things, income eligibility and purchasing a home that meets all program criteria.

Good to Know: The main advantage of this program is that you don’t have to pay a down payment. You also gain access to competitive interest rates and low monthly mortgage insurance. But if you can’t move out of a city or don’t want to live in a rural area, then this sort of programs isn’t for you.

#20 Sign Up for First Home Club

Quontic Bank offers first-time homebuyers this affordable housing program that allows up to $7,500 in grants. Basically, for each dollar you save in a Quontic savings account, you get four dollars to be used to acquire your new home.

Keep in Mind: This is a great home financing option, but remember that you will have to get your mortgage through Quontic in order to benefit from their grants.

#21 Make a Large Down Payment

If you can afford to pay a big down payment upfront, it can make up for a less-than-stellar credit history. Actually, a large down payment is one of the key requirements that lenders make for people with bad credit.It shows your lender that you are serious and unlikely to default, making it easier for you to get a mortgage.

That said, it’s not an easy decision and you should think carefully about how you are going to manage your financial situation before taking the leap.

#22 Last Resort: Personal Loans

If you find it extremely difficult to get a mortgage due to your bad credit, a personal loan is an alternative you might want to consider. Unlike a mortgage, a personal loan for a home requires no collateral. However, the maximum amount allowed is $100,000, so you would have to find a home at that price or lower.

So you can look for an affordable fixer-upper and improve it over time.

But if you run the numbers and they don’t look favorable, you should keep renting until you improve your finances.

#23 Try to Upgrade for Personal Loans under $50,000

If your budget is really tight and you are looking for a personal loan to purchase a property, give Upgrade a try.

Good to Know: This platform lets you get loans of up to $50,000, with flexible loan options and no prepayment fees. On top of that, you also have access to a free credit monitoring tool.

If  you don’t mind living in a modest house for a few years and you want to take the personal loan route, Upgrade will make things easier for you; learn more about it here.

Wrapping it Up

Buying a home is one of the biggest financial decisions you will make in your life.

Some say it’s a risky investment, but unless you are a globetrotter who is always on the road, you want to have a place to call home.

Buying a house and building equity is tricky when you have bad credit, so hopefully, the home financing options above will help you despite poor credit.

Do you research thoroughly, determine your available options and formulate a home financing strategy.

What’s your plan to purchase your home? Tell us in a comment below!

Logan Allec, CPA

Logan is a practicing CPA, Certified Student Loan Professional, and founder of Money Done Right, which he launched in July 2017. After spending nearly a decade in the corporate world helping big businesses save money, he launched his blog with the goal of helping everyday Americans earn, save, and invest more money. Learn more about Logan.

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