Purchasing your first home is an exciting milestone. Things can start to feel overwhelming, though, as you dive into financing – especially if you’re buying a home with bad credit. Don’t let that stop you from reaching for your homeownership dreams.
When you think about buying your first home, you might dream about finding “The One”. Before you jump head-first into offers and inspections, take time to think through the money matters that impact everything from your buying power to your monthly payments.
Here’s what you need to know as a first-time homebuyer:
You have options – even with bad credit or no credit. For conventional home loans, it is ideal to have saved up 20% of the purchasing price as a down payment. That number can feel impossible when you’re financially strapped, but don’t let that discourage you. As a first-time buyer, you will have access to other options, including state programs, tax benefits and federally-backed loans (FHA loans), if you are unable to save up the standard down payment. Buying a first home with bad credit is possible.
Review your spending and make a plan. When you take on a mortgage, you’re committing to a recurring monthly payment for the life of your loan. For most people, this is the biggest payment in their monthly budget. Before you buy a home, it’s important to understand where every dollar of your budget is going. Be honest about what a comfortable mortgage amount would be for your specific financial situation. Remember, you don’t want to max out your budget – leave money free to go toward things like growing your savings, planning for retirement or unexpected emergencies.
Your total income impacts your potential loan amount. It’s easy to fall in love with a property that you can’t afford – it happens to the best of us. That’s why lenders typically prefer to limit housing expenses, including principal, interest, taxes, and insurance, to about 30 percent of a borrower’s monthly gross income. This helps protect you from overspending and defaulting on your loan.
How credit impacts your home buying options:
It’s important to understand the factors that influence your credit score. Determining your credit score isn’t a magical equation – it’s simple math.
- Payment history (35%) – Do you have a history of making on-time or late payments?
- Credit utilization (30%) – What percentage of your available credit are you currently utilizing? How does that amount compare to your total monthly income?
- Length of credit history and age of accounts (15%) – How long have you been utilizing credit? Have you demonstrated responsible credit use over the years, or are you new to borrowing?
- Credit mix (10%) – What kinds of credit do you currently use? $10,000 in school loan debt may be considered with a different weight than $10,000 in credit card bills.
- New credit applications (10%) – Have you recently applied for new or different types of credit? Doing so can indicate to lenders that you might be in a bad financial situation and may have difficulties repaying your loan.
Your credit score matters – but it’s not the only thing lenders take into consideration. Lenders use your credit score as a standard to determine your risk as a borrower. A perfect credit score isn’t a requirement to buy a home, but it does impact the total loan amount you will be approved for – not to mention your interest rate. In addition to reviewing your credit rating, home loan lenders will also look for a history of paying your bills on time and a maximum debt-to-income ratio of 43 percent. If you are purchasing a home with someone else, such as a spouse, both of your credit scores and financial situations will be considered and factored into the lender’s decision.
Buying a home with bad credit? Try these things first. If you think you may be interested in purchasing a home in the future, now is the time to start improving your credit score.
- Avoid applying for additional credit, like a car loan or credit card, until after you’ve closed on your home. Each of these “hard inquiries” temporarily impacts your credit score, which will be reflected on your credit report when a mortgage lender begins reviewing your finances.
- Start paying down your debt ASAP. One of the fastest ways to improve your credit score is by paying down your credit card balances and debt. If possible, avoid using your credit cards entirely in the months leading up to applying for a mortgage to avoid any negative changes to your score.
- Rebuild your credit with a personal loan. In addition to getting you the money you need for things like unexpected expenses or major purchases, a personal loan from World is a smart and responsible way to begin building or rebuilding your credit. Taking out a personal loan can help you build credit as you make on-time, consistent payments and with our regular reporting to all three credit bureaus.
Check out what this happy customer has to say about being a part of the World family…
They helped me boost my credit score after a divorce. After paying my loan off, I started receiving correspondence in the mail to apply for credit . . . prior to the loan, I was in the low 500’s and, no lie, I began to get approved for credit cards, car loans, and now I’m in the process of buying another home.
– Arthur J.
Take things one steady step at a time:
When you have bad credit, rebuilding it can take time. As you start to pay down debt and establish a healthy payment history, you’ll slowly start to see that bad credit improve. Be sure to get pre-approved for a loan before making an offer on a home. In most markets, pre-approval is a requirement to have your offer considered by sellers. Once your mortgage lender has helped you complete the necessary paperwork for pre–approval, you’re ready to get to the fun part – house hunting!
Even if you have bad credit, it may still be possible to buy a home. Let us help you get started on improving your credit score. Apply for a World personal loan.