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How To Buy a House With Bad Credit But Good Income?

How To Buy a House With Bad Credit But Good Income?
by Jerome Foster - September 16, 2022

A home is one of the most expensive purchases a person will ever make. Most people cannot afford to pay cash for a home, so they must obtain a mortgage loan to finance the purchase.

Bad credit can make it difficult to apply for a loan. However, if you have a solid income, you may have options if you choose to purchase a property.

How to Buy a House with Bad Credit but Good Income?

There are a few ways to persuade a lender to provide you with a mortgage if you have low credit and a high salary and wish to buy a home.

One alternative is to make a greater down payment than usual. This may convince the lender to grant you a mortgage by reducing their risk.

The alternative is to use a loan with fewer rigorous standards than a traditional mortgage, such as an FHA loan.

What Do Mortgage Lenders Consider A Bad Credit Score?

In general, mortgage lenders deem credit scores below 670 to be poor. This credit score is classified as "subprime."

The majority of the time, a credit score might range from 300 to 850. The better your credit score is, the higher it is.

When it comes to determining loan decisions, every lender has different criteria, but most use comparable ranges when evaluating borrowers' credit ratings.

Your credit score will be determined by a number of aspects of your credit history, including your credit card debt and payment history on other loans, such as school loan debt or vehicle loans, among others.

It is also essential to remember that you have many credit scores. There are dozens of credit score models, and each gives differing weight to the information in your credit report.

According to Experian, one of the major credit bureaus in the United States, the credit score ranges are:

  • 300 – 579: Poor
  • 580 – 669: Fair
  • 670 – 739: Good
  • 740 – 799: Very Good
  • 800 – 850: Exceptional

The majority of lenders will prioritize applicants with credit scores in the "good" or above level. There are loan choices for individuals with fair credit ratings, but the interest rates and costs will climb substantially when your score falls into this area.

Any score below 760 will necessitate opting for less favorable rates. If your interest rate increases too much, it could make a house loan unaffordable, requiring you to make a higher down payment to decrease your monthly costs or wait until your credit score improves.

Can You Buy a House with Bad Credit?

Yes, it is feasible to purchase a home with poor credit. However, it may be more difficult to qualify for a loan, and the interest rate will likely be significantly higher than for someone with strong credit.

If you are able to qualify for a loan despite having poor credit, the lender will likely require a bigger down payment. For instance, while an FHA loan normally requires a 3.5% down payment, you may be required to make a 10% down payment if you have poor credit.

The bigger the needed down payment, the more cash you will need to acquire a home. Additionally, having low credit implies paying a higher interest rate. Whereas a borrower with excellent credit may qualify for a mortgage with an interest rate of 3%, a borrower with low credit may end up with an interest rate of 6% or even more.

The loan's interest rate will impact both the total cost of the mortgage and the monthly payment amount. If the interest rate is excessively high, you might not be able to afford the monthly mortgage payment. There is also the potential that your credit score will be too low for any mortgage provider to offer you a loan. This can occur if your credit report contains recent bankruptcy or other unfavorable information.

Regardless of your income, if your credit score is very poor, you may need to try to improve it before you can obtain a loan.

Lender Options You Have with Bad Credit:

Conventional Loans

A conventional loan is a typical mortgage that is not made available through a government-sponsored scheme. These loans can be obtained from a bank, credit union, mortgage broker, or other conventional lending institution.

Typically, lenders have minimum credit score criteria for applicants. The minimum credit score can be determined differently by each lender, but 620 or so is normal. For conventional loans, lenders are also able to set their own down payment requirements.

If your down payment is less than 20% of the home's worth, you will often be required to pay monthly private mortgage insurance. Private mortgage insurance increases your monthly payment.

Obtaining a traditional loan with poor credit might be challenging. To have any chance, you must locate a flexible lender and be prepared to make a substantial down payment. Additionally, be willing to accept a loan with a higher interest rate.

FHA Loans

An FHA loan is a particular form of loan for borrowers with weak credit or inadequate down payment cash. If you have a credit score of 580 or higher, you can get an FHA loan with only a 3.5% down payment. If your credit score falls between 500 and 579, you will be required to make a 10% down payment.

Additionally, you must have a debt-to-income ratio of less than 43% and use the loan to purchase a principal dwelling. You cannot use an FHA loan to buy a vacation or investment property. Because the government insures FHA loans, FHA lenders are prepared to accept borrowers with weak credit.

An FHA loan can be an excellent method to acquire a home if you meet the program's basic credit score standards. If your credit improves, you can refinance the loan to one without private mortgage insurance or with a cheaper interest rate at any time.

VA Loans

A VA loan is a terrific option for folks with terrible credit and a steady income to acquire a home, provided they can meet the program's conditions.

VA loans are administered by the VA to assist veterans and active service members in purchasing a house. The program allows for minimal down payments and does not require a minimum credit score. However, if you have poor credit, you should anticipate making a larger down payment.

To qualify for a VA loan, you must satisfy one of the following criteria:

  • Served 181 days of active duty during times of peace.
  • During wartime, served 90 consecutive days of active duty.
  • Served greater than six years in the National Guard or Reserves.
  • You are the surviving spouse of a service member who died in the line of duty or due to a service-connected disability.
  • If you are not a veteran or active-duty military member, you will not be eligible for a VA loan.

USDA Loans

The USDA loan program is intended to assist borrowers in purchasing a property in a rural location. The program is handled by the Agriculture Department of the United States.

Typically, lenders offering loans under this program require a minimum credit score of 640. However, if your score is below the minimum, you may qualify by giving more information.

For instance, you may qualify if you can provide consistent rent and utility payments. However, lenders are permitted to charge those with weak credit scores greater interest rates and demand larger down payments.

To qualify for a USDA loan, you must also meet the following criteria:

  • Have American citizenship (or permanent residency)
  • Apply for a loan with a monthly payment that does not exceed 29% of your gross monthly income.
  • Your ratio of debt to income cannot exceed 41%.
  • If you have strong credit (over 680), you may be eligible for a loan even if your debt-to-income ratio is high.
  • A history of continuous, reliable income, often for at least 24 months
  • A credit history that is satisfactory, with no accounts placed in collections during the past year. The USDA may consider mitigating factors if you have poor credit due to unforeseen circumstances.

How to Improve Your Credit Score?

Improving your credit score is one of the best things you can do to make the process of purchasing a home easier.

Regardless of the credit scoring mechanism your lender employs to evaluate prospective borrowers, there are basic steps you may take to improve your credit score.

Your credit score is determined by five variables:

  • Payment history
  • Amount owed 
  • Length of credit history
  • Types of credit
  • New credit

If you have the down payment and the income to support it, purchasing a home with terrible credit and a good salary can be a fantastic way to jump on the property ladder. After improving your credit score, you can always refinance your loan to obtain better interest rates.

If you are interested in more articles like this, here’s one about how you get the most money out of selling a house as-is.

Author

  • Jerome Foster

    Jerome has worked for an international real estate magazine in the past before joining Prudentialcal. He now spearheads our team of writers and ensures the quality of content we produce weekly.

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